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Key Provisions in M&A Agreements (Series: Private Company M&A Boot Camp)

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Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™
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Key Provisions in M&A Agreements (Series: Private Company M&A Boot Camp)

Although 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 episode explains specific, common provisions and discusses how buyers and sellers approach these provisions differently, particularly in light of situational differences (e.g. whether the assets being bought and sold are equity of a company or the assets of a company; whether the seller is going to cease to exists or not). Topics covered will include tax issues; corporate governance; closing conditions; representations and warranties; indemnification provisions; earn-outs; restrictive covenants; antitrust; intellectual property; and employment issues.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/key-provisions-in-ma-agreements-2019/

Although 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 episode explains specific, common provisions and discusses how buyers and sellers approach these provisions differently, particularly in light of situational differences (e.g. whether the assets being bought and sold are equity of a company or the assets of a company; whether the seller is going to cease to exists or not). Topics covered will include tax issues; corporate governance; closing conditions; representations and warranties; indemnification provisions; earn-outs; restrictive covenants; antitrust; intellectual property; and employment issues.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/key-provisions-in-ma-agreements-2019/

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Key Provisions in M&A Agreements (Series: Private Company M&A Boot Camp)

  1. 1. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 1
  2. 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  3. 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DISCLAIMER The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. About this PowerPoint: if you are looking at this PowerPoint without the benefit of listening to the conversation that surrounded it then you are doing yourself a disservice. This PowerPoint was prepared in contemplation of being viewed in conjunction with listening to a one hour webinar on the topic 3
  4. 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: Robert Londin – Jaspan Schlesinger LLP Panelists: Mark O'Brien – Chicago M & A Advisors, Inc. Aarthi Belani – Jones Day Jacqueline Brooks – Saul Ewing Arnstein & Lehr 4
  5. 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS WEBINAR: Key Provisions in M&A Agreements Although 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 episode explains specific, common provisions and discusses how buyers and sellers approach these provisions differently, particularly in light of structure differences (e.g., whether the company or its assets are being acquired). Topics covered will include tax issues; corporate governance; closing conditions; representations and warranties; indemnification provisions; earn-outs; restrictive covenants; antitrust; intellectual property; and employment issues. 5
  6. 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS SERIES: Private Company M&A Boot Camp Corporate transactions (or “deals”) include many types of transactions. Viewed broadly, a deal can be a very small matter such as drafting a purchase order, a non-compete agreement, or myriad other single-purpose agreements necessary to document a legal relationship between two parties, and extend to large multi-national acquisitions and financings. One of the most significant types of transactions a company can enter into, however, and the type that is commonly thought of as needing a “deal” lawyer, is a Mergers and Acquisitions transaction. M&A, viewed broadly, includes buying or selling all or part of a business or company, as well as business combinations, such as mergers. Such “deal” work commonly requires attorneys, accountants, and bankers to work together with the counterparties. This 2019 PRIVATE COMPANY M & A BOOT CAMP webinar series features leading M&A attorneys and other deal professionals speaking about private company M&A in roughly chronological order, guiding the audience through a conversation that spans from deal origination, the LOI (letter of intent) or term sheet, due diligence, document drafting and negotiation, closing, and post-closing. Issues addressed include tax planning and structure; corporate governance; negotiating deal points and common pitfalls and challenges; closing conditions; representations and warranties; indemnification provisions; earn-outs; restrictive covenants; antitrust; intellectual property; and employment. While many of the topics covered apply also to public company M&A, the focus of this webinar series is on M&A involving a privately-owned company or business. 6
  7. 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 8/6/19 Episode #1: Structuring and Planning the M&A Transaction 9/10/19 Episode #2: Key Provisions in M&A Agreements 10/15/19 Episode #3: The M&A Process 11/12/19 Episode #4: Post-Closing Issues 12/10/19 Episode #5: Negotiating an M&A Deal 7 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  8. 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Episode #2: Key Provisions in M&A Agreements 8
  9. 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OUTLINE • Purchase Price • Representations and Warranties • Post-Closing Covenants • Closing Conditions • Restrictive Covenants • Indemnification • Choice of Law/Venue/Dispute Resolution/Boilerplate 9
  10. 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe A COUPLE OF QUICK CAVEATS •Key provisions 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. •There are important distinctions between stock transactions, asset purchases, and mergers (and among different types of mergers). You should assume, though, for purposes of our presentation today, that our conversation will apply to all of these types of transactions unless otherwise stated. 10
  11. 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PURCHASE PRICE GENERALLY • How is it calculated? • How much are sellers getting at closing vs. what’s deferred? • What’s the risk in what’s deferred? • Cash vs. stock • Capital gains vs. ordinary income (allocation) • Is all stock/are all assets of selling company being sold? 11
  12. 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CALCULATION OF PURCHASE PRICE • For privately-held companies, purchase price is most often calculated as a multiple of EBIT (Earnings before interest and tax) or cash flow; the multiple will vary based on many factors but most importantly the industry and the status of the business cycle. • Some businesses are valued based on book value, and a variety of metrics are used for businesses which are pre-profit or even pre-sales. • Sellers who are independently approached by potential buyers should strongly consider hiring a valuation consultant/financial advisor to ensure the fairness of the offer they are considering and to negotiate/shop their businesses. 12
  13. 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PURCHASE PRICE AT CLOSING VS. FUTURE PAYMENTS (THE “WHEN”) • General rule for sellers in a cash transaction: get as much as soon as you can. • Depending on interest rate, if any, in note, Sellers lose time value of money. • However, spreading out payments over multiple tax years may help sellers arbitrage tax liability. 13
  14. 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PAYMENTS OF PURCHASE PRICE SUBSEQUENT TO THE CLOSING (THE “IF”) • 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. • 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. • Seller protections: ✓ Security ✓ Guaranty ✓ Letter of credit • Convertibility of note 14
  15. 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CASH VERSUS STOCK • Buyers often seek to pay Sellers in stock of the buying company. • 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. 15
  16. 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CAPITAL GAINS VS. ORDINARY INCOME TAX CONSEQUENCES • 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). • 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). 16
  17. 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CAPITAL GAINS VS. ORDINARY INCOME TAX CONSEQUENCES (cont'd) • Payments for physical assets such as inventory and equipment in an asset sale will also be taxed at ordinary income tax rates. • 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. 17
  18. 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RECAPITALIZATIONS AND REORGANIZATIONS • 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 company; many times a buyer will buy target’s equity in two stages. • In some of these instances, a buyer will come in as a preferred stockholder with enhanced rights and protections. • In a best case scenario, existing management will remain incentivized and have more resources to grow the business as it moves forward. 18
  19. 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE THREE PRACTICAL CONSIDERATIONS OF REPRESENTATIONS AND WARRANTIES Due Diligence Aid, The Bringdown, and Indemnity/Purchase Price Adjustment • Due Diligence Aid ✓ Helps Buyer; ✓ Helps Buyer and Seller confirm purchase price. • The Bringdown- “Are we good to close?” • Basis for Indemnification 19
  20. 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TYPES OF REPRESENTATIONS AND WARRANTIES • Transaction Generally (good standing, capacity, authorization, enforceability, no conflicts, etc.) • 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 • Industry Specific - Licenses, Permits, Regulatory, etc. • Target Specific - material contracts, Top 20 suppliers, Top 20 customers (raises disclosure concern; NDA) • The Catchall; 10b-5. 20
  21. 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OTHER CONSIDERATIONS • Who makes the representations and warranties (tie to indemnity)? • Joint and Several ✓ Tied to indemnity ✓ If deal falls apart after signing (recourse) 21
  22. 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OTHER CONSIDERATIONS: KNOWLEDGE QUALIFIER (cont'd) • Actual Knowledge • Implied/imputed knowledge • Due inquiry prong • Entity’s “Knowledge” relative to that of its management team or senior executives. 22
  23. 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MATERIALITY QUALIFIER? • Quantify? • MAC Relationship • Recent Delaware case law regarding materiality/MAC 23
  24. 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INDEMNIFICATION • The indemnification provisions are most typically how buyer is compensated for damages it suffers, most often from Sellers’ breaches of the representations. • One of the most intensely negotiated parts of a M&A agreement. • Key issues are limitations (time, dollar amounts), process and scope 24
  25. 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 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) 25
  26. 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe BASKETS AND CAPS (DOLLAR LIMITS) • Basket/Threshold (Amount % & Types) – Tipping –Non-Tipping (Pure Deductible) –Split Basket –“Non-Basket Losses” • Indemnity Cap –Customary percentages –“Non Cap Losses” 26
  27. 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INDEMNITY MECHANICS • Holdback • Escrow (always better to be the party holding the money) • Holdback Note (offset) • Offset against Earn-out (if applicable) 27
  28. 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MISCELLANOUS ISSUES • Joint and several liability • Role of insurance, tax and other recoveries • Exclusivity of remedy 28
  29. 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY 29
  30. 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Robert Londin – rlondin@jaspanllp.com A partner in his 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 in capital markets transactions; emerging-growth companies; seed 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 compensation and separation arrangements. Rob serves as general counsel to many clients and their senior executives and advisory boards. This general corporate representation covers 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 strategic alliances, technology licensing, mergers and acquisitions, corporate finance, venture capital, banking transactions and general corporate needs. 30
  31. 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Mark O'Brien – mark@chicagomaa.com Chicago M&A Advisors - M&A focused investment bank that executes mergers, acquisitions, & growth capital for privately held & family businesses between $10M and $100M. Deal experience is across manufacturing, distribution, technology, consulting services, dealers, and contractors. Target markets are strategic businesses, private equity groups, and family offices. Hands-on owner and M&A experience, was 3rd generation manufacturing business owner. Experienced corporate M&A executive, lead acquisitions for a privately held industrial distributor executing multiple deals to gain market share, expand product lines and add resources. Mark spent several years in management consulting working directly with small business owners defining vision and strategic redirections developing & implementing business growth and transition plans. Mark is a mentor & consultant through the Score Chicago branch of SBA. Chairman - Society of Manufacturing Engineers - Chicago. Board - Legacy Reentry Foundation assisting formally incarcerated. Member of Alliance of Merger and Acquisition Advisors - Certified M&A Advisor 31
  32. 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Aarthi Belani – abelani@jonesday.com Aarthi Belani is a partner in the M&A practice in the Silicon Valley office of Jones Day. She focuses on M&A and venture deals in tech and life sciences. Prior to joining Jones Day, Aarthi was on the in- house legal team covering strategy and corporate development at Credit Suisse in New York. 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 Leadership Committee member of How Women Lead, a nonprofit that is part of the 2020 Women on Boards campaign to increase the representation of women on corporate boards, and a director of Bidoun, a not-for-profit publishing, curatorial, and educational initiative that prints a quarterly magazine showcasing art and culture from South Asia and 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. 32
  33. 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Jacqueline Brooks – jacqueline.brooks@saul.com Jacqueline Allen Brooks concentrates her practice in general business and commercial law. She counsels clients in mergers and acquisitions, purchases and sales of businesses, commercial finance, private offerings of debt and equity securities, and life science transactions, and shareholder derivative matters, including shareholder demand responses and special committee issues. Jacqueline has experience representing public companies, privately owned and managed companies, nonprofit organizations and start-up companies and provides general counsel to these organizations regarding corporate matters. Prior to joining Saul Ewing Arnstein & Lehr, Jacqueline participated in Washington University School of Law’s D.C. Clinic, through which she was an intern to the United States House Judiciary Committee. In this capacity, she drafted legal memoranda to assist Congressman John Conyers, Jr. and the Congressman’s legislative assistants at Judiciary Committee hearings and briefings. To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/jacqueline- brooks/ 33
  34. 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe QUESTIONS OR COMMENTS? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 34
  35. 35. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 35 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.

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