There is an old carpenters’ expression, “measure twice, cut once.” M&A work is just one of many areas in business and law where this expression resonates. Buyers and sellers, like chess players anticipating many moves in advance, should envision and plan the route to get a deal done, including anticipated detours, at the onset of the transaction. This webinar discusses the similarities and differences between basic M&A transaction structures; purchase price payment concerns; the most common issues that arise in the early stages of M&A transactions of all kinds; the relationship between ostensibly unrelated sections of an M&A agreement; and transaction timeline. One focus of this episode is a threshold question in many deals: whether the buyer will buy equity or assets. This episode will, in summary form, cover many of the issues discussed in greater depth in subsequent episodes. Part of the webinar series: M&A BOOT CAMP - 2022 See more at https://www.financialpoise.com/webinars/

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4. Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
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4

5. Meet the Faculty
MODERATOR:
Robert Londin - Jaspan Schlesinger LLP
PANELISTS:
David Adler – David Adler, P.C.
Bob Dekker – Balmoral Advisors
Tim Ladin – tladin@mfpllc.com
Michael D. Weis - Firsel Ross & Weis
5

6. About This Webinar – Structuring and Planning the
M&A Transaction
There is an old carpenters’ expression, “measure twice, cut once.” M&A work is just one of
many areas in business and law where this expression resonates. Buyers and sellers, like
chess players anticipating many moves in advance, should envision and plan the route to get
a deal done, including anticipated detours, at the onset of the transaction.
This webinar discusses the similarities and differences between basic M&A transaction
structures; purchase price payment concerns; the most common issues that arise in the
early stages of M&A transactions of all kinds; the relationship between ostensibly unrelated
sections of an M&A agreement; and transaction timeline. One focus of this episode is a
threshold question in many deals: whether the buyer will buy equity or assets. This episode
will, in summary form, cover many of the issues discussed in greater depth in subsequent
episodes.
6

7. About This Series – M&A Boot Camp
This 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.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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8. Episodes in this Series
#1: Structuring and Planning the M&A Transaction
Premiere date: 8/25/22
#2: Key Provisions in M&A Agreements
Premiere date: 9/22/22
#3: The M&A Process
Premiere date: 10/27/22
#4: Post-Closing Issues: Integration & Potential Buyer/Seller Disputes
Premiere date: 11/17/22
#5: Negotiating an M&A Deal
Premiere date: 12/15/22
8

9. Episode #1
Structuring and Planning the M&A Transaction
9

10. Outline
• Transaction Structures
• Tax Planning
• Acquired Business’s Liabilities
• Purchase Price Components
• Due Diligence
• Representations and Warranties
• Timeline; Early Concerns and Topics
• Post-Closing Concerns (Purchase Price Adjustment and Indemnification)
10

11. Drivers of Structure
• Nature of target – is target private or public?
• Who is acquirer – is acquirer strategic or financial?
• Nature of consideration– is buyer paying with cash, notes, stock, or a combination?
• Timing of consideration; adjustments – is all consideration to be paid at closing, or will
there be any deferred payments or adjustments for working capital, earnouts, etc.?
• Type of transaction – is acquirer purchasing assets or stock of target, or will transaction
take the form of a merger?
11

12. Drivers of Structure: Nature of Target
• Private Target
✔ Negotiation will focus on reps and warranties, indemnity, and purchase price
adjustments
✔ Less focus on fiduciary out; shareholder approval is commonly obtained shortly
after signing
12

13. Drivers of Structure: Nature of Target (cont’d)
• Public Target
✔ Negotiation focus on conditions to closing
✔ No indemnity or purchase price adjustments
✔ Reps and warranties act as closing conditions
✔ Heavily “market” driven
✔ Fiduciary out
13

14. Drivers of Structure: Nature and Timing of
Consideration
• Cash
✔ Defined value
✔ Certain liquidity
✔ Key issue often timing
✔ Holdbacks/Escrow
✔ Post-closing adjustment mechanism
14

15. Drivers of Structure: Nature and Timing of
Consideration (cont’d)
• Notes
✔ Defined value
✔ Limited liquidity
✔ Credit risk
✔ Collateral
✔ Offset in support of indemnity
15

16. Drivers of Structure: Nature and Timing of
Consideration (cont’d)
• Acquirer Stock
✔ Uncertain value
✔ Uncertain liquidity
✔ Potential tax advantages
✔ Registration rights
16

17. Tax Overview
• Taxable Asset Purchases
• Tax Issues in Stock Purchases
✔ Taxable Stock Purchases
✔ Private Company
✔ Section 338(h)(10) Considerations
✔ Subsidiary of a Consolidated Group
✔ S Corporation
• Tax Free Reorganizations
17

18. Overview of Potential Tax Liabilities
• Basic “buckets” of tax liabilities that can impact economics:
✔ Historic Tax Liabilities
✔ Transaction Tax Liabilities
✔ Future Tax Liabilities
✔ Carryover basis
✔ Built in gain
18

19. Historic Tax Liabilities
• Pre-closing tax liabilities relating to pre-closing periods are virtually certain to exist. This
issue is less acute for development-stage companies with no historical profit
• Pre-closing tax liabilities may not be known until being assessed following an audit.
• Definitive Agreement should include tax covenants regarding pre-closing periods and
“straddle” periods
19

20. Transaction Tax Liabilities
• Transaction itself may trigger additional taxes:
✔ Golden parachute payments (Section 280G)
✔ Making a Section 338(h)(10) election
✔ Transaction that is “pursuant to a plan” (e.g. Section 355(e))
✔ Deferred intercompany gains triggered by the sale of a subsidiary out of a
consolidated group or an “s” corporation or LLC with “built in gain” or “hot assets”
• After-Tax analysis – each party will analyze cost of transaction after considering all
applicable taxes. Taxes attributable to the transaction may represent either an increase or
decrease in purchase price (and/or a sharing of such “delta”)
20

21. Taxable Asset Purchase Agreements
Tax Representations and Warranties:
• Generally fewer and more limited than in a stock purchase agreement
• Seller typically retains liability for Target’s pre-closing taxes, including:
✔ Target income taxes
✔ Sales, ad valorem, or other pre-closing taxes
✔ All or a portion of taxes allocable to the sale and transfer of the assets
21

22. Taxable Asset Purchase Agreements (cont’d)
Seller Reps typically include:
✔ Sales and employment withholding taxes have been paid
✔ All other taxes relating to the acquired business have been paid
✔ There are no audits, assessments or deficiencies relating to the transferred business
• Seller may take position that it should represent only that the purchased assets are not
subject to any tax liens which is typically and successfully rebutted by the purchaser
22

23. Taxable Stock Acquisition Agreements
• Preparation and filing of tax returns
• Payment of taxes
• Tax elections and other actions
• Cooperation in taking return positions, audits, and tax disputes
• Filing and payment of transfer taxes
• Termination of tax sharing agreements
23

24. Taxable Stock Acquisition Agreements: Private Target
Overview of Tax Indemnities:
• Typically, acquisition agreements contain stand-alone tax indemnification provisions
whereby Seller agrees to indemnify Buyer for -
✔ Pre-closing and relevant Straddle Period taxes of Target
✔ Taxes of the selling consolidated or combined group (as discussed in Section 4)
✔ Certain other relevant taxes, as well as costs and expenses
24

25. Taxable Stock Acquisition Agreements: Private Target
(cont’d)
• In most cases, Seller is also required to indemnify Buyer for damages due to breach of tax
representations and warranties
✔ In some cases, Seller will only indemnify for breaches resulting in pre-closing tax
liabilities (vs. increases in post-closing taxes due to misrepresentations as to tax
attributes)
• Interaction of tax indemnifications on general indemnifications should be considered
✔ Tax provisions override general provisions
✔ General basket and cap limitations typically do not apply
• Seller generally will not indemnify Buyer for increases in target’s tax liabilities resulting
from acts taken by Buyer on or after the closing.
25

26. Taxable Stock Acquisition Agreements
Additional Tax Indemnification Negotiation Issues:
• Seller may not be required to indemnify buyer for pre-closing taxes if tax liability was
disclosed on (or reserved for on) a closing balance sheet that resulted in purchase price
adjustment or was taken into account in pricing the deal
• Indemnifications usually characterized as purchase price adjustments to make clear that
any payment by Seller should not result in income to Target or Buyer
26

27. Taxable Stock Acquisition Agreements (cont’d)
Tax Audits and Contests:
• If Seller has agreed to indemnify buyer for pre-closing taxes, Seller generally will retain
control of tax contests relating to pre-closing tax periods; but purchasers may limit such
control right to the extent future tax positions are adversely affected
27

28. Code Section 338(h)(10) Considerations
Built-in Asset Gain and 338(h)(10) Election:
• Where Target has built-in gain in its assets:
✔ Buyer will want to purchase assets to step up their basis to fair market value
✔ Seller may prefer to sell stock if it would recognize less gain on a stock sale
• A 338(h)(10) election, which allows Buyer to receive a basis step up in a taxable stock
sale, is available where Target is either:
✔ An S corporation
✔ An 80% subsidiary of another corporation
28

29. Code Section 338(h)(10) Considerations (cont’d)
• Both the Seller and the Buyer must agree to make the 338(h)(10) election
• The election recharacterizes transaction as deemed purchase by “New” Target from
“old” Target of “old” Target assets
✔ The deemed asset purchase is followed by a tax-free liquidation of “old” target into
Seller
✔ A single level of tax on the asset sale replaces the single layer of tax that would have
been paid on the stock sale
• The 338(h)(10) election can result in incremental income or franchise taxes for Seller
29

30. Code Section 338(h)(10) Considerations (cont’d)
Effect of 338(h)(10) election on NOLs, Capital Losses, Credits and Depreciation:
• If 338(h)(10) election made:
✔ Target’s historic NOLs, capital losses and credits will disappear
✔ Buyer generally will have greater depreciation and amortization deductions
• Buyer must compare detriment of losing Target’s NOLs, Capital losses and credits
(keeping in mind that they may have been limited under Section 382 and 383) with the
benefit of the increased depreciation and amortization deductions
30

31. Code Section 338(h)(10) Considerations (cont’d)
Documenting a 338(h)(10) Election:
• Buyer should include in letter of intent that Seller, at Buyer’s request, will participate in a
338(h)(10) election
✔ If Buyer waits until the negotiation of definitive agreements to raise the issue (after the
price has been agreed), Seller may seek to be reimbursed for the entire amount of the
incremental cost it bears on account of making the election
• Even though the sale of stock is treated as an asset sale, Buyer needs to get same basic
representations and warranties that it would get in a private stock acquisition
31

32. Taxable Stock Acquisition Agreements: Target is a
Subsidiary in a Consolidated Group
Tax Returns and Indemnity
• Seller generally entitled to:
✔ File initial consolidated returns due following closing which reflect Target’s
operations prior to closing
✔ File amended consolidated returns for the year in which the transaction closed
✔ Control any audits of these returns, including ability to extend the statute of
limitations and to settle or litigate claims
32

33. Taxable Stock Acquisition Agreements: Target is a
Subsidiary in a Consolidated Group (cont’d)
• Seller will resist attempts to impose restrictions on filing and defending these returns
because they generally include the operations of Seller and all of its subsidiaries
• Because Target remains liable for pre-closing taxes of Seller and the consolidated
group, Seller generally gives Buyer a full indemnity for pre-closing taxes
✔ This indemnity is given even where there is no indemnity protection for non-tax items
✔ One common carve-out is for pre-closing taxes accrued on a closing balance sheet,
if balance sheet serves as basis for purchase price adjustment or accrual is
otherwise taken into account in pricing deal.
33

34. Tax-Free Acquisition Agreements
Tax Representations and Warranties:
• Agreements relating to the acquisition of a company in a tax-free transaction reflect the
Seller’s continuing relationship with the Target and the Buyer
• Because Seller receives Buyer stock in a tax-free acquisition, Buyer may make some or all
of the same tax representations that Seller makes
• Tax representations in a tax-free deal generally mirror those found in a taxable stock
purchase
✔ In a “C” reorganization, Seller may try to give limited warranties similar to those in an
asset acquisition, but Buyer may insist on full stock purchase representations
because of concerns about the state law treatment of the transaction.
34

35. Tax-Free Acquisition Agreements (cont’d)
Tax Representations and Warranties:
• Buyer and Seller generally agree to make reasonable efforts to have the transaction
qualify as tax-free
• Buyer and Seller tax counsel generally are required to render a clean opinion as to the
tax-free status of the transaction
35

36. Tax-Free Acquisition Agreements (cont’d)
Tax Covenants:
• Seller
✔ Seller will seek a representation/covenant that buyer will take no action – either pre or
post-closing – that would jeopardize the qualification of the transaction as tax free
• Buyer
✔ Buyer may resist post-closing covenant on grounds it could restrict legitimate business
decisions beneficial to all shareholders
o If post-closing covenant agreed to, Buyer will generally limit to a specific list of
restrictions on its actions
o Target shareholders may seek a “best” efforts standard
o More common to agree on “reasonable” efforts
36

37. Tax-Free Acquisition Agreements (cont’d)
Tax Opinions:
• Buyer and Seller tax counsel generally are required to render a clean opinion as to the tax-
free status of the transaction
✔ In case of a “B” or “(a)(2)(E)” reorganization, Buyer’s counsel may not be asked to
provide – and buyer may not be permitted to condition its closing upon – an opinion
✔ Agreement may provide that if counsel for either Buyer or Seller refuses to issue their
opinion, opposing counsel can issue its opinion to both parties to satisfy the closing
condition.
37

38. Tax-Free Acquisition Agreements (cont’d)
Tax Opinions:
• In rendering their opinions, tax counsel generally require Buyer and Seller each to make a
series of representations based on representations that the IRS used to require when it
was issuing letter rulings in this area
✔ These representations generally are not included in the acquisition agreement, but
rather in certificates or letters issued to the two tax counsel
38

39. Tax-Free Acquisition Agreements (cont’d)
Indemnity:
• Buyer generally refuses to indemnify Target shareholders if a putative tax-free stock
exchange is found to be taxable
✔ Tax-free treatment on the transaction defers the Target shareholders tax liability, it
does not eliminate it
✔ Indemnification would generally unjustly enrich the Target shareholders
39

40. Requirements by Transaction
• Stock Purchase Agreements
✔ All shareholders of target company must sell their shares
✔ Potential to purchase 100% outstanding shares and squeeze-out remaining
shareholders through merger
✔ Remaining shareholders have dissenters/appraisal rights; or remain as a minority
shareholder subject to buyer/company call right
• Merger Agreements
✔ Does not require approval of 100% of target company shareholders
✔ Non-consenting shareholders may assert dissenters/appraisal rights
40

41. Requirements by Transaction (cont’d)
• Asset Purchase Agreements
✔ Shareholders of target company must approve sale
✔ No appraisal/dissenters rights in Delaware (but yes in Illinois)
• Appraisal/Dissenters Rights
✔ Allow non-consenting shareholders to seek “fair value” for shares
✔ Court decides what “fair value” is
41

42. Reps and Warranties: Purpose
• Indemnity
✔ Seller makes a series of reps to Buyer about Seller and its business
✔ Seller and/or Seller Principals provides indemnity if reps are breached
• Closing Condition
✔ Reps true at signing and at closing
✔ Buyer can walk if reps not true at closing
✔ Closing standard may require reps be true “in all material respects” (strong) or “in all
respects”, except where such breach would not constitute a “Material Adverse Effect”
(weak)
42

43. Reps and Warranties: Purpose (cont’d)
• Diligence
✔ Reps tend to “focus a seller’s mind” and support due diligence investigation
✔ Schedules list exceptions to the reps and help focus diligence
✔ Schedules may force affirmative disclosures – e.g., contracts, independent contractors,
insurance claims history, etc.
• Risk Allocation
✔ Buyer will ask Seller to rep to matters it is not certain of
✔ Purpose is to allocate risk regarding matters to Seller
o Frequently a matter of negotiations between Buyer and Seller
43

44. Reps and Warranties: The “Knowledge” Qualifier
• A “knowledge” qualifier is intended to shift the risk of the unknown from the Seller to the
Buyer
✔ Example: “To the Seller’s knowledge, none of the Seller’s products that are or have
been designed, created, developed, assembled, manufactured or sold by Seller is
infringing, misappropriating or making any unlawful use of any intellectual property
owned by any other person.”
• Be very careful to understand from the parties who bears the risk if an “unknown”
becomes “known” during the pre-closing period.
✔ If it is intended that the Buyer continues to bear the risk, then be sure to add a
temporal element to the representation.
✔ Example: “To the Seller’s knowledge as of the date hereof, ...”
44

45. Reps and Warranties: The “Knowledge” Qualifier
(cont’d)
• Whose knowledge?
✔ Every person in the company?
✔ C-level executives?
✔ Who knows about the deal?
• What level of knowledge?
✔ Actual knowledge?
✔ Actual knowledge, after due inquiry?
✔ Knowledge a person would reasonably be expected to have by virtue of such person’s
title, or position with, or duties performed for, the Company?
45

46. Reps and Warranties: The “Materiality” Qualifier
• A “materiality” qualifier is intended to shift the risk of the immaterial from the Seller to the
Buyer
• Significant difference between “material” or “in all material respects” standard and
“Material Adverse Effect” standard
• Double materiality is something Buyer should avoid or limit
• Addressed in “buckets”/”thresholds” in indemnification provisions
46

47. Reps and Warranties: Financial Statements Reps
• Often considered the single most important rep in an agreement
• Carries with it a whole host of background rules and requirements related to preparation
and audit
• Seller should be comfortable representing to financial statements
• Consider unique situations, unaudited companies, place in audit cycle
47

48. Reps and Warranties: Undisclosed Liabilities Rep
• Broad rep intended to be read broadly
• Consider whether date is from latest audit or latest interim financials
• Buyer should review Schedule of Liabilities very carefully (avoid “narrative” explanations
of potential liabilities and make sure there are dollar amounts identified for each liability)
48

49. Reps and Warranties: Undisclosed Liabilities Rep
(cont’d)
• Buyer’s Perspective
✔ Allowance for doubtful accounts is an estimate (prepared by Seller) based on Seller’s
historical collection rates and thus should cover any amounts not collected
✔ Assures Buyer collection of a minimum dollar amount (especially important if Buyer has
priced deal on A/R amount)
49

50. Reps and Warranties: Undisclosed Liabilities Rep
(cont’d)
• Seller’s Perspective
✔ Seller should not guarantee the collection efforts of Buyer; or guarantee accounts
receivable (perhaps to the extent beyond a reserve set forth in financial statements (see
below))
✔ All accounts receivable of the Seller (i) represent valid obligations of customers of Seller
arising from bona fide transactions entered into in the ordinary course of business, (ii) are
current, [and (iii) are fully collectible, subject to any allowance for doubtful accounts.]”
50

51. Reps and Warranties: 10b-5 / Anti-Sandbagging Rep
• 10b-5
✔ States that reps do not contain any material misstatements or omissions.
✔ In a stock deal, Rule 10b-5 may be present by operation of law
o Rep creates a contractual claim with indemnity obligations
✔ Seller will try to avoid giving a 10b-5 rep because it “swallows” the other negotiated
reps
✔ Seller due inquiry and access representation
• Anti-sandbagging
✔ States that buyer does not know of any untrue reps
✔ Seller seeking to avoid “close and sue”
✔ Buyer will try to avoid giving an anti-sandbagging rep to avoid disputes about “ what
did the buyer know” prior to Closing
51

52. Reps and Warranties: Schedules
• Two Purposes
✔ Carve out from reps and indemnity
✔ Disclosure
• Cross Reference Provision
✔ Disclosure for one rep satisfies another (typical formulation: to the extent inference is
reasonable)?
52

53. Covenants: Two Types
• Pre-Closing
• Post-Closing
53

54. Covenants: Pre-Closing
Operation of the Seller’s Business
“During the pre-closing period, Seller shall conduct its business in the ordinary course
consistent with past practice and shall not take the following actions...”
• Seller’s Perspective:
✔ Seller needs to ensure that it can operate the business in a manner that will not leave
it unduly damaged in the event the deal does not close
✔Seller’s desire to protect trade secrets up to closing
• Buyer’s Perspective:
✔ Buyer will want certainty that Seller’s financial and business condition is substantially
the same at closing as at signing
54

55. Covenants: Pre-Closing (cont’d)
Anti-Trust Regulatory Approvals
“The parties agree to take all actions necessary to obtain all applicable U.S. and approvals in
connection with the Merger.”
• Buyer’s Perspective:
✔ Buyer may not be able to find purchaser/acceptable price for business unit if
divestiture is required
• Seller’s Perspective:
✔ Immaterial divestitures required by regulators should not give Buyer a “walk” right
55

56. Covenants: Pre-Closing (cont’d)
Access
“The Company will make its facilities and personnel reasonably available to the Buyer during
normal business hours.”
• Buyer’s Perspective:
✔ Buyer wants to start integration planning
• Seller’s Perspective:
✔ Seller needs to keep running the Company well to make sure conditions are met
✔ Seller does not want Buyer to engage in fishing expeditions prior to closing
✔ Seller does not want Buyer indirectly operating business - through contact with its
employees, soon to be Buyer’s employees – until business is actually sold
56

57. Covenants: Post-Closing
• Tax cooperation
• Asset transfer cooperation
• Publicity
• Non-compete; No-Solicit; Confidentiality
• Employee matters
• Other
57

58. Indemnity: Key Issues
• Indemnification for what?
✔ Breaches of reps and warranties
✔ Breaches of covenants
✔ Specific indemnity items (e.g., litigation which has been disclosed by Seller)
58

59. Indemnity: Key Issues (cont’d)
• Limitations
✔ Joint or several
✔ Survival or representations and warranties
✔ Caps (i.e., maximum amount of recovery)
✔ Baskets/Thresholds
✔ Escrow as source of recovery
✔ “Indemnifiable Loss” definition
✔ Tax Effect
✔ Insurance Coverage/Pursuit of Claim
✔ Limited Recourse
59

60. Indemnity: Survival
• Survival Periods typically range from 6 months to 36 months, tend to be 12 months to 18
months (or tied to completion of next audit cycle)
• Parties should focus on “business realities” when negotiating length of survival period
(i.e., how long will it take before Buyer has a sense whether representation has been
breached?)
• Certain representations and warranties may survive until the applicable statute of
limitations (e.g., tax, ERISA, environmental)
• Other “basic” representations typically survive forever (e.g., ownership of the shares,
capitalization of Target (in stock deal), authorization of transaction)
60

61. Indemnity in General
• Seller will typically try to cap Buyer’s recovery for indemnity claims to a portion of the
purchase price (e.g., the amount of the escrow, fixed dollar amount, % of purchase price,
etc.)
• Baskets/Thresholds
✔ Intended to discourage immaterial claims
✔ Amount typically reflects an agreed upon dollar amount, which is typically based on
a percentage of the purchase price
✔ A proxy for materiality?
✔ “Indemnity Scrape” of Knowledge qualifiers and, perhaps, materiality qualifiers
61

62. Indemnity in General (cont’d)
• Sole remedy provision
✔ Fraud, willful breach carveout
✔ Generally used when Buyer believes Seller may not be able or willing to meet
potential indemnification obligations or Buyer is unwilling to go through the process
of collecting from seller
62

63. Outline
• Earn-Out Provisions
• Antitrust Issues
• Intellectual Property Issues
• Employment Issues
• Financing the Transaction
63

64. Earnouts
• A pricing mechanism with a portion of the final purchase price contingent upon actual
post-sale Target performance
• Key characteristics:
✔ Identified achievement criteria
✔ More common in sale of privately-held companies
✔ More frequent in deals with transaction value below $250 million
• Used when:
✔ Buyer cannot effectively value business or Seller and Buyer cannot agree on
valuation, so Buyer ties purchase price to future performance
✔ Buyer has insufficient cash for payment of full purchase price at closing
64

65. Rationale for Earnouts
• Used by Buyers and Sellers to bridge valuation gaps
✔ Rewards Seller if projections are accurate
✔ Limits overpayments by Buyer for business that fails to achieve projections
• May be particularly useful in the following situations:
✔ Volatile industries
✔ Unproven product, technology or contract pipeline
✔ General economic uncertainty
✔ Undercapitalized Buyer
65

66. Earnings Criteria
• Should be easily measured and confirmed
• Typical performance criteria include: net revenues, net income, EBIT, EBITDA, earnings
per share, or net equity thresholds
• Non-financial benchmarks for early stage companies
• CONCERNS
✔ Does Buyer have a duty to Seller?
✔ Reporting obligation and dispute mechanism
66

67. What is the Purpose of Antitrust Laws?
1. Antitrust and Competition laws have been adopted in more than 100 countries
2. The basic premise of the US antitrust laws:
✔ The unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices, the highest quality and the greatest material
progress...
✔ Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958)
67

68. What is the Purpose of Antitrust Laws? (cont’d)
3. The US antitrust laws are meant to protect competition for the benefit of consumers (but
not to protect competitors). They prohibit:
✔ Agreements to restrain trade (e.g. price-fixing, group boycotts)
✔ Misuse of market power (monopolization)
✔ Price discrimination (under certain circumstances)
✔ Mergers or acquisitions that substantially reduce competition
68

69. Who Enforces the Antitrust Laws?
• US Agencies: Federal Trade Commission & US Department of Justice, Antitrust Division
• States’ Attorneys General
• Foreign competition law agencies (more than 100)
• Private lawsuits (including class actions)
69

70. Merger Review: Section 7 of the Clayton Antitrust
Act of 1914
1. All mergers, acquisitions, and joint ventures are subject to government review, at both
Federal and State level
✔ Only one federal agency reviews any transaction; multiple States may review
✔ Even if not subject to prior notification, US agencies can challenge
✔ Private parties can object and can file suit to challenge
✔ Challenges can be brought either before or after closing
70

71. Merger Review: Section 7 of the Clayton Antitrust Act of 1914
2. Antitrust laws prohibit acquisitions and combinations the effect of which may be
“substantially to lessen competition” in any line of commerce in any section of the country.
2. Hart Scott Rodino Act Filings (HSR Filings)
✔ The size-of-person test applies to transactions valued at less than $200 million (as
adjusted, $376 million) and is based on the total assets and annual net sales of the
ultimate parent entities (UPEs) of the acquiring and acquired persons. In general, to
be reportable, the UPE of one party to the transaction must have annual net sales or
total assets of $10 million or more (as adjusted, $18.8 million), and the UPE of the
other party must have annual net sales or total assets of $100 million or more (as
adjusted, $188 million).
71

72. Buyer’s Considerations
• How important is IP to the transaction?
• Conduct an internal IP audit to identify needed intellectual property assets and rights
• Tie to disclosure schedule
• Evaluate transaction structures
• Prepare confidentiality agreement and purchase agreement (for negotiated transaction)
• Chain of title clearance and issues addressed
• Maintenance/Validity of all IP to be transferred
• Identify all agreements with IP ownership or transfer obligations and rights (including
workforce “work-for-hire” agreements)
• Varied level of diligence based on nature of transaction
72

73. Purchase Agreement
• Seller’s Concerns
✔ Limiting post-closing liabilities
✔ Retaining intellectual property needed to conduct other businesses
• Buyer’s Concerns
✔ Obtaining everything necessary to conduct the business
✔ Limiting assumed liabilities (infringement claims) and protection of purchased IP post-
closing
73

74. Potential Liability for a Buyer May Arise from Seller’s:
• Defined benefit plans
• Multi-employer pension plans
• Retiree medical or life insurance plans
• Severance plans
• Executive and equity compensation plans/agreements
• International employee benefit plans (other than statutory benefits)
74

75. Nature of Transaction Generally Controls: Stock
Purchase
•Buyer assumes plans/agreements of target by operation of law.
✔ Assets of liabilities go to Buyer
✔ Assess potential liabilities (may impact price)
•Consider effect of the acquisition on employee benefit plans, employment agreements,
equity arrangements, etc. at target
✔ Identify benefits triggered by change in control (single or double trigger)
•Consider whether pre-acquisition plan termination is appropriate
•Important to know if there are limitations on what Buyer can do with target plans post-
closing of if there are significant costs that arise from post-closing terminations.
75

76. Nature of Transaction Generally Controls: Asset
Purchase
•Buyer purchases only those assets and assumes only those liabilities specified under the
purchase agreement.
•Unless Buyer assumes an obligation relating to a benefit plan, the acquisition will not
automatically result in assumption of liabilities.
✔ COBRA (health care continuation) coverage may be required in certain instances
✔ Potential defined benefit plan/controlled group liability even if pension plan not
assumed.
✔ Buyer should still assess potential liabilities, because it may get sued (even if the
claim is not successful)
•If Buyer assumes plan/agreements, treat assumption same as stock purchase.
76

77. Controlled Groups
• Target company will have joint and several liability with respect to certain ERISA
liabilities with other members of Target’s “controlled group”.
• In general, affiliates that have 80% or more overlapping ownership are part of a
controlled group.
✔ As a result, liabilities assumed by buyer may be broader than those at target
company level.
✔ Title IV (pension plan).
✔ COBRA obligations.
77

78. Defined Benefit Pension Liabilities: Non-Union
•Defined benefit plans are subject to Pension Benefit Guaranty Corporation (PBGC)
insurance. PBGC rules are comprehensive and complex
•Obligation of plan to pay promised benefit must be actuarially funded by the employer over
time
•Complex minimum funding requirements
78

79. Defined Benefit Pension Liabilities: Non-Union
(cont’d)
•Plan Terminations
✔ In general, a tax-qualified defined benefit plan cannot be terminated unless fully
funded
✔ Exceptions to general rule may arise when all members of controlled group are
bankrupt
✔ Under certain circumstances, plans may be terminated involuntarily by PBGC
✔ Liability for any underfunding in defined benefit plan upon termination will be joint
and several among all members of controlled group
79

80. Multi-Employer Plans for Union Employees
• Subject to withdrawal liability rules, in addition to rules governing required contributions
• Withdrawal occurs when an employer ceases to participate in a multiemployer plan or
experiences certain levels of reduced plan participation
• Estimating potential withdrawal liability can be difficult
• Asset deals may trigger withdrawal liability unless parties agree that Buyer will assume
liabilities of the seller and certain other requirements are satisfied
80

81. Welfare Plans: Severance and Retiree Medical/Life
•Generally subject to less extensive regulation than pension plans
•Severance liability issues
✔ Review severance plan to determine the circumstances under which severance may be
paid and the amount of/formula for determining severance
✔ Consider potential costs of future terminations
✔ Consider whether severance may be triggered merely by virtue of the occurrence of the
transaction (particularly an asset transaction), and whether steps should be taken to
address such a possibility
81

82. Welfare Plans: Severance and Retiree Medical/Life
(cont’d)
•Retiree Medical/Life Issues
✔ Group of employees covered
✔ Estimate of liability
✔ Ability to terminate
82

83. Executive Compensation: In General
• Generally, governed by contract.
✔ Starting point is determining what the relevant agreement/plan provides for and
whether there is any discretion to interpret provisions
• Employment and Other Agreements
✔ Employment contracts/offer letters
✔ Individuals or other SERPs
✔ Stay/transaction/other bonus agreements
83

84. Executive Compensation: In General (cont’d)
•Stock and other equity-based compensation.
•Types of equity-based compensation:
✔ Stock rights, including stock options and stock appreciation rights
✔ Restricted stock
✔ Restricted stock units
✔ Other equity and equity-based plans
•Conversion/cash-out issues
•Tax issues
•Change in Control Arrangements/280G
84

85. Executive Compensation: Equity
85
Existing Award Treatment in Transaction
Target stock options Typically, cashed out-
• Holder gets cash which is taxed
at ordinary rates
Less commonly, options are rolled
over, in which case-
• Tax event is deferred until
ultimate exercise and then taxed
at ordinary rates

86. Executive Compensation: Equity (cont’d)
86
Existing Award Treatment in Transaction
Restricted shares and
restricted stock units
Typically, vest by their terms at closing and are
cashed out as part of transaction-proceeds taxed
at ordinary rates (ordinary income rate or, if an
IRC Section 83(b) election has been made by
awardee, capital gains rate)
Restricted stock awards may vest at closing and
shares rolled over, but vesting will still result in
ordinary taxable income
Target shares Often cashed out as part of transaction-
• Proceeds taxed as capital gains
But can be rolled over on a tax free basis
(deferring gains tax until future liquidity event)

87. Executive Compensation Equity: Stock Options
Plan/individual agreements will determine whether any or all of the following alternatives for
treatment of options are available in a given transaction:
•Cancellations :
✔ Out-of-the-money options
✔ Other unexercised options
• Cash Outs:
✔ Spread only
✔ Payment of transaction consideration
87

88. Seller Will Often Ask Buyer for Evidence that Buyer
has Ability to Finance Acquisition
Such evidence commonly takes following forms:
• In Letter of Intent/Term Sheet, Buyer will specify whether third party debt or equity
financing will be required, and often date by which a firm commitment for financing must
be obtained
• In the Purchase Agreement, Seller may ask Buyer for a rep that Buyer has wherewithal
to close transaction and/or a covenant that Buyer will use commercially reasonable
efforts to obtain financing
• If period of time exists between signing Purchase Agreement and closing transaction,
Seller will ask to be kept apprised of status of Buyer’s financing, and Seller may ask for a
pre-closing covenant to this effect; Deposit by Buyer upon signing is a possibility
88

89. Buyer Financing Condition
• If Buyer is in strong negotiating position or if credit markets are uncertain, Buyer will
customarily obtain a “financing condition”, which is a closing condition in Purchase
Agreement that says Buyer does not have to close transaction if Buyer does not obtain third
party financing on reasonable terms.
• If closing condition is contained in Purchase Agreement, then Buyer’s financing term
sheet with bank or other financing source will often be attached to the Purchase Agreement
as exhibit and serve as basis for financing terms Buyer must accept
• Buyer’s financing source (i.e., bank) will usually perform its own due diligence on Seller’s
business to ensure that collateral for loan (i.e., the Seller’s assets) is sound.
• Consider “break-up” fees depending on circumstances of failure to close.
89

90. Seller Note
• If outside financing is unavailable to Buyer, parties may negotiate a “Seller note”, which is
agreement by Seller to accept part of purchase price in form of promissory note rather than
cash at closing. Seller notes also “bridge the gap” in valuation and in certain instances, can
be used to offset indemnity claims
• Seller notes customarily have a term of 1-5 years and constitute 20-50% of purchase
price (but sometimes more)
• Seller should remember that Seller note payments usually are subordinate to other
obligations of company, including financing by outside parties
90

91. About the Faculty
91

92. About The Faculty
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.
92

93. About The Faculty
David M. Adler - david@adler-law.com
David M. Adler, Esq. is the principal attorney and driving force behind Adler Law Group’s Technology
Practice Group with an extensive background and experience in corporate law, including contract
interpretation, drafting, negotiation, and enforcement and intellectual property law.
He received his law degree from the DePaul University College of Law where he wrote for the DePaul
Arts & Entertainment Law Journal. He received a Bachelor of the Arts in English, a Bachelor of the Arts
in History with a minor in Chemistry from Indiana University in Bloomington, Indiana.
Outside the practice of law, Mr. Adler teaches an undergraduate course on E-Business in the Arts,
Entertainment & Media Management Department of Columbia College Chicago. He also currently chairs
the Chicago Bar Association's Start-up and Entrepreneurial Ventures Subcommittee and contributes to
Workz.com as a "guest expert" columnist for the ecommerce and small business sections.
93

94. About The Faculty
Bob Dekker - bdekker@balmoraladvisors.com
Bob is a career capital markets professional and operating executive with extensive experience working with companies ranging from
emerging growth to large, publicly traded enterprises. He specializes in developing and implementing creative capital formation
strategies and advising clients on alternative approaches for maximizing shareholder value in connection with merger and acquisition
activities. Bob has been an advisor to a wide assortment of public and private companies in the food and consumer products
industries including independent and franchise restaurants, food retailers and food packaging companies.
Prior to joining Balmoral, Bob co-founded Insight Advisory Partners, a boutique investment banking firm based in Chicago focused on
the food and beverage sector. Previously he was a senior banker with ABN AMRO, Inc. and its predecessor, The Chicago Corporation,
where he managed the firm’s private placement activities in North America. Bob began his career with Prescott, Ball & Turben, Inc. (an
affiliate of Kemper Insurance Company) in Cleveland, OH. During his investment banking career, he has arranged over $2 billion of
private market transactions.
Bob is a member of the Association for Corporate Growth where he co-chairs the committee responsible for hosting ACG’s Annual
Food Conference. For the past five years, he has served as a Super Mentor to several emerging growth food companies that have
been accepted into the Good Food Business Accelerator (part of the 1871 incubator) mentoring program. He is also a faculty member
of Financial Poise, a Web-based information platform that provides financial and legal education to individual investors and private
business owners. Bob holds a BA in Economics from Denison University. Bob is a registered principal with Bridge Capital Securities
(62, 63, 79).
94

95. About The Faculty
Tim Ladin - tladin@mfpllc.com
Tim is General Counsel, Vice President and Chief Compliance Officer of MFP Investors LLC,
an SEC registered investment advisor, and related entities of the family office of Michael F.
Price. In addition to the legal, compliance and operations of MFP, he manages a portfolio of
real estate, venture capital, private equity, and hedge fund investments. In this role he
regularly sits on boards of portfolio companies to advise on capital raising, governance and
M&A activity.
95

96. About The Faculty
Michael D. Weis - mweis@firselross.com
Michael is a principal of Firsel Ross & Weis, representing privately and publicly held entities in business and
commercial transactions. He has handled the negotiation and closing of hundreds of complex corporate and
commercial real estate transactions both domestically and internationally. Michael's clients span a number of
industries including manufacturing, distribution, real estate, health care, food and beverage, technology, and
professional services. Armed with a wealth of knowledge and experience in corporate, real estate, and finance
matters, including being a Certified Public Accountant since 1985, Michael helps his clients succeed personally
and in business. His corporate experience includes all aspects of mergers and acquisitions, securities, and
corporate governance.
Michael's legal career spans three decades. He focuses on mergers and acquisitions, "Outside General
Counsel" representation, commercial finance, securities, real estate, tax and estate planning, and administration
matters. Prior to joining Firsel Ross & Weis, Michael's practice included 10 years at a boutique firm in Chicago
where he served as chair of the firm's business and transactional practice. Additionally, Michael was General
Counsel for a long-term care organization. He began his legal career with a Chicago-based corporate and
securities law firm, where he was an associate and then a partner.
96

97. Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
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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.
97

100. About Financial Poise
100
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