"Cross-Border Transactions from a US Perspective” was presented by Martijn Steger on September 12, 2008, to Deutscher Handels-und Gesellschaftsrechtstag in Berlin Germany.
Martijn discussed the attorney/client relationship, due diligence, break-up fees and selected German law provisions that U.S. clients have trouble understanding or accepting.
1. Cross-Border Transactions from a
U.S. Perspective
By
S. Martijn Steger
Kegler, Brown, Hill & Ritter
Berlin – 12 September, 2008
to
Deutscher Handels-und Gesellschaftsrechtstag
2. 2
Index
Slide Numbers
I. Attorney/Client Relation 5 – 13
A. Liability cap/restriction 5 – 7
B. Contingent fees and other
fee structures 8 - 10
C. Billing/time sheets 11 - 13
II. Due Diligence 14 – 16
A. Challenges of electronic data
rooms in multijurisdictional transactions 14 - 16
3. 3
Index
Slide Numbers:
III. Break-Up Fees 17 – 22
IV. SPA 23 – 60
A. Material Adverse Change
Clauses 23 – 30
B. De minimis/Basket/Cap 31 – 38
C. Locked box 39 – 42
D. Limitation periods for Reps &
Warranties in Private Target
deals 43 - 44
4. 4
Index
Slide Numbers
E. Some important reps and warranties 45 – 58
F. Selected German law provisions that
US clients have trouble understanding
or accepting 59 - 60
Sources 61
Legal Advice 62
Thank You / Contact Information 63
5. 5
I. Attorney/Client Relation
• A. Liability cap/restriction
» More common in Europe than the USA
» US law firms carefully consider the firm’s
malpractice insurance coverage
» Rules of ethics in many US states restrict lawyers
limiting liability to clients
6. 6
I. Attorney/Client Relation
• A. Liability cap/restriction, cont’d.
» Ohio’s Rules of Ethics provide as follows:
» “A lawyer shall not … make an agreement
prospectively limiting the lawyer’s liability to a client
for malpractice or requiring arbitration of a claim
against the lawyer unless the client is independently
represented in making the agreement.” Rule
1.8(h)(1).
7. 7
I. Attorney/Client Relation
• A. Liability cap/restriction, cont’d.
» No Ethical restriction on capping liability to third
parties, such as in Closing Opinions
» Malpractice Insurance should be checked to
determine scope of coverage for such Opinions
» Not aware that excess coverage policies are
available. If available, perhaps could negotiate to
pass along to client the cost of the premium
8. 8
I. Attorney/Client Relation
• B. Contingent fees and other fee structures
» Contingent fees are permitted in civil matters,
including M&A deals, so long as they are
“reasonable”. Ohio Ethics Rule 1.8(i)(2), which is
similar to the rules in many other states
» A key concern is the lawyer’s “independence”
» Reasonableness will depend on a number of
factors, including the sophistication of the client
» The contingent fee agreement must be in writing in
many states. Good practice anyway
9. 9
I. Attorney/Client Relation
• B. Contingent fees and other fee structures,
cont’d.
» I am not aware of publicly-available data about the
percentages for contingent-fee deals in the USA
» My firm’s experience is that contingent-fee deals are unusual.
» More common is providing estimates of each stage of the
M&A process
» Also, fairly common is a “discount” if the deal does not close
coupled with a “kicker” if the deal does close. Both are
normally fairly small – 20% or less
10. 10
I. Attorney/Client Relation
• B. Contingent fees and other fee structures, cont’d.
» The fixed fee is an alternative to hourly and contingent fee
structures
» Fixed fees are difficult to set for entire transactions, but easier
for discrete, well-defined stages
» Typically, US lawyers give fee estimates in ranges for the
entire transaction
11. 11
I. Attorney/Client Relation
• C. Billing/time sheets
» Content varies depending on the nature of the billing
» If hourly rate billing, the typical invoice will include a
detailed time sheet
» If contingent fee or fixed fee billing, the detail will be
much less
» Most US clients prefer the invoices monthly
12. 12
I. Attorney/Client Relation
• C. Billing/time sheets, cont’d.
» Contents of an hourly fee bill often include the
following:
• Identity of the fee earner
• Date service performed
• Description of the services performed (varies from a few
words to a long paragraph).
• Amount of time spent
• Cost (time x rate)
13. 13
I. Attorney/Client Relation
• C. Billing/time sheets, cont’d.
» Descriptions of the services performed to which US clients
react negatively:
• “Services re M&A transaction”
• “Internal conference with attorney Heavy Biller”
• “Research re I.R.C. Section 338”
» US clients appreciate invoices that describe the issue and the
solution provided
• E.g., “Brief analysis of Seller’s unique Locked Box valuation
method and develop rationale for post-completion true up.”
» Most also object to charges for costs that they believe should
be included in overhead
14. 14
II. Due Diligence
• A. Challenges of electronic data rooms in
multijurisdictional transactions
» EDRs are commonly used by US clients, especially
in cross-border deals
» One major issue: Security of the information.
• User name and password protocols are the minimum
• EDR providers might offer additional protections, e.g.,
digital identification certificates
• Some clients have their own proprietary systems
15. 15
II. Due Diligence
• A. Challenges of EDRs in multijurisdictional
transactions, cont’d
» Another major issue: How do you determine the
relevance of documents, which cover several
jurisdictions, for your due diligence?
• Work with excellent local counsel
• Dealing with language issues & determining what to
translate
• Due Diligence Reports: “Red Flags” Only?
• Have a clear list of your client’s main objectives
• Create a well-organized DD Checklist
• Require answers imbedded in the DD Checklist
16. 16
II. Due Diligence
• A. Challenges of EDRs in multijurisdictional
transactions, cont’d
» Be aware of the risk (and benefit) that EDRs are
normally transparent – e.g., who reviewed what
documents and for how long
» Terms of Use can be an issue:
• E.g., modifications to documents, or not?
• Normally, electronic deal rooms are separate, because the
SPA & other deal documents are modified during the
course of negotiations
17. 17
III. Break-Up Fees
• Potential Triggers for Break-Up Fees
» Simple or Naked No-Vote Fee
» No-Vote after Acquisition Proposal
» After Drop Dead date + Acquisition Proposal
» Change in Board recommendation
» After certain breaches of acquisition agreement
» The amount of the fee varies depending on the
trigger
18. 18
III. Break-Up Fees
• Simple or Naked No-Vote Fee
» Is a trigger in about half of Private Equity Buyer and
about ten percent of Strategic Buyer deals with
Public Company Sellers*
» Vast majority of those clauses require
reimbursement of expenses as the Break-Up Fee*
19. 19
III. Break-Up Fees, cont’d
• No Vote after Acquisition Proposal
» Is a trigger in about 85% of both Private Equity
Buyer and Strategic Buyer deals with Public
Company Sellers*
» About 90% of the deals required the Break-Up Fee
be paid at signing or consummation of the third-
party deal *
20. 20
III. Break-Up Fees, cont’d
• After Drop Dead date + Acquisition Proposal
» Is a trigger in about 60% of both Private Equity
Buyer and Strategic Buyer deals with Public
Company Sellers*
» Over 90% of the deals required the Break-Up Fee
be paid at signing or consummation of the third-
party deal *
21. 21
III. Break-Up Fees, cont’d
• Change in Board recommendation
» Is a trigger for payment of a Fee in 97% of both
Private Equity Buyer and Strategic Buyer deals with
Public Company Sellers*
22. 22
III. Break-Up Fees, cont’d
• After Certain Breaches of Acquisition
Agreement
» General breach of Reps & Warranties was NOT a
trigger in 97% of both Private Equity Buyer and
Strategic Buyer deals with Public Company Sellers*
» Breach of Stockholder Meeting Covenants was NOT
a trigger in 80% of both Private Equity Buyer and
Strategic Buyer deals with Public Company Sellers*
» Breach of a No-Shop provision was NOT a trigger
for a Fee in 80% of Private Equity Buyer deals and
64% of Strategic Buyer deals*
23. 23
IV. SPA
• A. Material Adverse Change clauses
» Also called MAE – material adverse effect
» MAC or MAE clauses conceptually capture “force
majeure” events, but go far beyond them
» Critical issues include the definition (or not) of
“materiality”:
• Leave it vague?
• Make it more precise by defining it as having, e.g., an
impact on EBITDA of X% or more?
24. 24
IV. SPA
• A. Material Adverse Change clauses, cont’d
» MAC or MAE Clauses are common Conditions to
Closing
• 100% of Private Equity Buyer and 99% of Strategic Buyer
deals with Public Company Sellers*
• 78% of Private Equity Target Deals included a standard
MAC clause and at least some of the other 22% included a
simple “absence of changes” clause or an “accuracy of
representations” clause*
• The majority of those standard MAC clauses included “no
pending or threatened legal proceedings”*
25. 25
IV. SPA
• A. MAC/MAE clauses, cont’d.
» Typical Strategic Buyer’s MAC Clause allowing a
“Walk Right”:
» “No Material Adverse Change. Since the date of
this Agreement, there has not been any material
adverse change in the business, financial condition
or results of operations of the Target or its
Subsidiaries taken as a whole.”*
26. 26
IV. SPA
• A. MAC/MAE clauses, cont’d.
» Typical Private Equity Buyer’s MAC Clause allowing
a “Walk Right”:
» “No Material Adverse Change. Since the date of
this Agreement, there has not been any material
adverse change in the business, financial condition
capitalization, assets, liabilities, operations, results
of operations [or prospects] of the Target or its
Subsidiaries taken as a whole.”*
27. 27
IV. SPA
• A. MAC/MAE clauses, cont’d.
» Only about 5% of Strategic or Private Equity Buyers’
MAC Clauses contain “prospects”, but do include
forward-looking language such as “events that
could/would reasonably be expected to result in a
MAC/MAE”*
28. 28
IV. SPA
• A. MAC/MAE Carveouts include:
• “Changes adversely affecting the US economy
(so long as the Target is not disproportionately
affected thereby)”.
» Over 90% of all Buyers of Public Companies had
that carveout, but about 70% of the Strategic Buyer
deals had the “disproportionate” language as
compared to nearly 80% of the Private Equity Buyer
deals*
29. 29
IV. SPA
• A. MAC/MAE Carveouts include:
• “Changes adversely affecting the industry in
which the Target operates (so long as the
Target is not disproportionately affected
thereby)”.
» Over 75% of all Buyers of Public Companies had
that carveout, but about 85% of the Strategic Buyer
deals had the “disproportionate” language as
compared to nearly 95% of the Private Equity Buyer
deals*
30. 30
IV. SPA
• Other Common MAC/MAE Carveouts*
» “Announcement or pendency of transactions
contemplated by this Agreement” (~80%)
» “Change in accounting principles” (~65%)
» “Changes in laws” (~60%)
» “War/Terrorism” (~50%)
» “Failure to meet analyst projections” (~35%)
31. 31
IV. SPA
• B. De minimis/Basket/Cap (as a limitation on
indemnification or damages provisions)
» De minimis amounts, also called Eligible Claim
Thresholds, only were used in about 20% of Private
Target deals with baskets*
» My experience and that of Kegler Brown is the
opposite
32. 32
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Baskets were used in about 97% of deals with
Private Targets*:
» 54% were Deductible deals, aka “non-tipping
baskets”
» 36% were First Dollar deals, aka “tipping baskets”
» 7% were a combination (i.e., the Deductible was a
different amount than the basket or threshold)
33. 33
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Baskets as a % of Transaction Value in Private
Target deals*:
» 62% were .5% or less
» 28% were .5% to 1%
» 8% were 1 to 2%
» 2% were greater than 2%
» The trend, compared to the last study in 2004, is to
smaller baskets.
34. 34
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Baskets covered the following in Private Target
deals*:
» Breaches of Reps & Warranties - 100%
» Breaches of Covenants - 55%
» Other Indemnity Claims - 39%
35. 35
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Significant carveouts from Baskets in Private
Target deals*:
» Fraud - 55%
» Capitalization - 52%
» Due Authority - 47%
» Taxes - 42%
» Ownership of shares, Intentional Breach of
Seller’s/Target’s Reps & Due Organization - ~30%
» These percentages are all up from 2004 study.
36. 36
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Caps in Private Target Deals were used as
follows*:
» 88% were less than the Purchase Price and, where
determinable, 44% equaled the Escrow Amount
» 7% equaled the Purchase Price
» 4% had caps that were in an undeterminable
amount and in 1% the cap amount was silent
37. 37
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Cap amounts in Private Target Deals as a % of
Transaction Value*:
» 26% were less than 10%
» 21% were 10%
» 17% were 10 to 15%
» Another 17% were 15 to 25%
» 5% were 25 to 50%
» Another 5% were 50% of the PP up to the PP
» 9% were the PP
» No clear trend from the 2004 study.
38. 38
IV. SPA
• B. De minimis/Basket/Cap, cont’d.
• Significant carveouts from Caps in Private
Target deals*:
» Fraud - 64% (down from 77% in 2004)
» Capitalization - 46% (up from 26%)
» Due Authority – 43% (up from 11%)
» Taxes - 40% (up from 27%)
» Ownership of shares, Intentional Breach of
Seller’s/Target’s Reps & Due Organization - ~30%
39. 39
IV. SPA
• C. Locked box
• An alternative, popular with Sellers, to a post-
completion reconciliation of accounts / “true up”
of the Purchase Price
• Will see more of it in “Sellers’ Markets,” such
as when more private equity money is chasing
deals than quality companies are available for
sale
• No statistics on how much it is being used in
USA, but seems to be increasing
40. 40
IV. SPA
• C. Locked box, cont’d
• Concept: The parties agree on the PP for the
Target based on the last audited balance
sheet, management’s most recent balance
sheet or an agreed pro forma balance sheet.
» Critical to Buyer first to perform all necessary DD on
the Target & especially on that balance sheet
» Buyer must also make sure Seller does not
manipulate working capital between the time of the
agreed balance sheet and completion
41. 41
IV. SPA
• C. Locked box, cont’d.
• Normally, Seller will covenant that no leakage
will occur during that time, including no
dividends, no distributions or other returns of
capital and no other payments to Seller or
affiliates other than at arm’s length.
• Exceptions could be agreed-upon debt
repayments and payments to third parties in
the ordinary course of business
42. 42
IV. SPA
• C. Locked box, cont’d.
• Buyer often will ask for:
» Indemnification to cover any leakage that was not
permitted
» Covenant concerning conduct of business between
signing and closing
» Warranty of accuracy of the balance sheet
» Reps concerning the accuracy of DD information
from Seller
43. 43
IV. SPA
• D. Limitation periods for Reps & Warranties in
Private Target deals*
» Express No survival – 4%
» 6 - 12 months – 2%
» 12 months – 26%
» 12 - 18 months – 9%
» 18 months – 34%
» 18 – 24 months – 3 %
» 24 months – 16%
» Greater than 24 months – 5%
44. 44
IV. SPA
• D. Major carveouts to limitation periods for
Reps & Warranties in Private Target deals*
» Taxes – 67% (up from 55% in 2004)
» Capitalization – 59% (up from 38%)
» Due Authority – 54% (up from 31%)
» Ownership of Shares – 42% (up from 21%)
» Employee Benefits/ERISA – 39% (vs 31%)
» Fraud- 37% (vs 20%)
» Due Organization, Environmental & Breach of
Seller’s/Target’s Covenants – 37%
45. 45
IV. SPA
• E. Some important reps and warranties
• The importance of reps & warranties varies
somewhat from one deal to another – e.g.,
environmental.
• I will give a few examples of reps & warranties
that are normally critical
46. 46
IV. SPA
• E. Some important reps and warranties, cont’d
• Financial Statements, including “Fair Presentation”
» “The Financial Statements: (i) have been prepared from the
books and records of the Company in accordance with US
GAAP consistently applied during the periods covered thereby
(except as otherwise disclosed therein); (ii) are complete and
correct in all material respects; and (iii) fairly present in all
material respects the financial position and the results of
operations of the Company (on a consolidated basis) as of the
dates and during the periods indicated therein…”* [NOTE:
Part (iii) is not GAAP qualified.]
47. 47
IV. SPA
• E. Some important reps and warranties, cont’d.
» 75% of Private Target deals had a “Fairly Presents”
rep that was not GAAP qualified (as versus 84% in
2004)*
48. 48
IV. SPA
• E. Some important reps and warranties, cont’d.
• Internal Controls / Accuracy & Completeness
» “The Company’s internal controls and procedures
are sufficient to ensure that the Latest Financial
Statements and the Annual Financial Statements
are accurate in all material respects.
» … [All] accounts, books and ledgers related to the
business of the Company are properly kept, are
accurate and complete in all material respects, and
there are no material inaccuracies or discrepancies
of any kind contained or reflected therein.”*
49. 49
IV. SPA
• E. Some important reps and warranties, cont’d.
» 45% of Private Target deals included a Internal
Controls rep and only 31% of them had the
“Accurate and Complete” component*
50. 50
IV. SPA
• E. Some important reps and warranties, cont’d.
• Buyer-favorable version of “No Undisclosed
Liabilities” representation: “Except as set forth
in the Disclosure Letter, Target has no Liability
except for Liabilities reflected or reserved
against in the Balance Sheet or the Interim
Balance Sheet and current liabilities incurred in
the Ordinary Course of Business of Target
since the date of the Interim Balance Sheet.”*
51. 51
IV. SPA
• E. Some important reps and warranties, cont’d.
• Target-favorable version of No Undisclosed
Liabilities: “Except as set forth in the
Disclosure Letter, Target has no liability of the
nature required to be disclosed in a balance
sheet prepared in accordance with GAAP
except for …”*
52. 52
IV. SPA
• E. Some important reps and warranties, cont’d.
» Some deals used other wording for this “No
Undisclosed Liabilities” rep, but even so*:
» 93% of Private Target deals included some form of
the No Undisclosed Liabilities rep, with
• 68% Buyer-favorable (“All Liabilities”)
• 32% Target-favorable (“GAAP Liabilities”)*
» Even with other formulations of this rep, 83% of
them had a “ordinary course since Balance Sheet”
qualifier, 44% had a “materiality” qualifier and only
7% had a “knowledge” qualifier.*
53. 53
IV. SPA
• E. Some important reps and warranties, cont’d.
» A few notes about Disclosure Letters:
• Normally provided on the eve of completion – if so, very
frustrating to Buyer’s counsel
• Often much negotiation over whether disclosures made in
due diligence (within and outside the EDR) qualify the reps
& warranties or whether any qualifications must be stated
in either the reps & warranties themselves or the
Disclosure Letters
54. 54
IV. SPA
• E. Some important reps and warranties, cont’d.
• Compliance with Law representation*
» 99% of Private Target deals had it. Of those:
» 76% covered past and present
» 77% included Notice of Violation
» 32% included Notice of Investigation, but
» Only 10% were “knowledge” qualified
55. 55
IV. SPA
• E. Some important reps and warranties, cont’d.
• Compliance with Law representation*
» 22% had NO “materiality” qualifier
» 23% were qualified by a defined MAE
» 55% were qualified by an undefined use of
“materiality”*
56. 56
IV. SPA
• E. Some important reps and warranties, cont’d.
• “10b-5/Full Disclosure” representation
• “10b-5”: “No representation or warranty or
other statement made by Target in this
Agreement [or] the Disclosure Letter … in
connection with the Contemplated
Transactions contains any untrue statement or
omits to state a material fact necessary to
make any of them, in light of the circumstances
in which it was made, not misleading.”*
57. 57
IV. SPA
• E. Some important reps and warranties, cont’d.
• “Full Disclosure” representation: “Seller does
not have Knowledge of any fact that has
specific application to Seller (other than
general economic or industry conditions) and
that may materially adversely affect the assets,
business or results of operations of Seller that
has not been set forth in this Agreement or the
Disclosure Letter.”*
58. 58
IV. SPA
• E. Some important reps and warranties, cont’d.
» In Private Target deals*:
• The 10b-5 rep was included in 52%
• 10b-5 plus Full Disclosure was included in 10%
• No such rep was in 38% of the deals
» In the deals that had a rep, only 26% were
“knowledge” qualified*
59. 59
IV. SPA
• F. Selected German law provisions that US
clients have trouble understanding or accepting
» German Labor Laws, including:
• Workers’ Councils
• Automatic transfer of employment agreements by law
(para. 613a German Civil Code) in asset deals
• Restrictions on and payment for non-compete clauses
60. 60
IV. SPA
• F. Selected German law provisions, cont’d.
» Other issues include:
• Maintenance of statutory capital and liability of Buyer if
Seller paid the statutory capital back
• No certificates for shares in GmbH and thus no “proof” that
the sold share exist
61. 61
Sources
• When the statements are marked with an *, the
information is from one of the following 2007
M&A Deal Point Studies from the ABA:
» Strategic Buyer/Public Target
» Private Equity Buyer/Public Target
» Private Target (v2)
» These are projects of the M&A Market Trends
Subcommittee of the Com’te on Negotiated
Acquisitions of the American Bar Association’s
Section of Business Law
62. 62
Legal Advice
• This presentation is designed to provide an
overview of a number of legal principles and
considerations
• As each legal issue is fact dependent, this
presentation should not be used or viewed as
legal advice, and your legal counsel should be
consulted on the application of your particular
factual situation to the current law
• Copyright: 2008 Kegler, Brown, Hill & Ritter
63. 63
Thank You / Contact Information
S. Martijn Steger
Kegler, Brown Hill & Ritter Co., L.P.A.
Ste. 1800, 65 E. State St.
Columbus, OH 43215
Direct Dial: 1 614 462 5495
Fax: 1 614 464 2634
Email: msteger@keglerbrown.com
www.keglerbrown.com