2012 M&A Deal Terms Study

14,352 views

Published on

0 Comments
7 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
14,352
On SlideShare
0
From Embeds
0
Number of Embeds
46
Actions
Shares
0
Downloads
0
Comments
0
Likes
7
Embeds 0
No embeds

No notes for slide

2012 M&A Deal Terms Study

  1. 1. 2012 SRS M&A Deal Terms Study An analysis of deal terms and post-closing experience in private-target M&A transactions For more information, please contact SRS at dts@shareholderrep.com2012 SRS M&A Deal Representative Services LLC. All© 2012 Shareholder Representative Services LLC. All rights reserved.© 2012 Shareholder Terms Study rights reserved. | 1www.shareholderrep.com www.shareholderrep.com
  2. 2. About SRS | Shareholder Representative ServicesA closed deal is not a done deal. Anything can happen after closing. A great variety of issues, often unpredicted, ariseover the months and years following the sale. SRS has accumulated years of experience through hundreds of deals. When thestakes are high, shareholders require the most experienced post-closing team.You worked hard to close the deal. Make sure you have the right representative to see it through.The SRS Difference: §  Better escrow economics through Acquiom™ Acquiom provides a completely re-engineered M&A escrow, investment and payments service, which provides a superior client experience while reducing transaction expenses.§  M&A analytics to drive better deals SRS has the most extensive database of M&A deal-terms and post-closing claims from private company sales ever assembled. §  Unmatched dispute resolution and litigation management SRS is the only firm with post-closing expertise based on the successful resolution of hundreds of claims and the completion of final escrow releases and earn-out milestone payments. §  Post-closing escrow management, client support, online access, and monthly reporting SRS offers superior client service by anticipating questions and issues that could arise and delivering information online 24/7.SRS also offers SRS MAX™ for customized deal analytics, and SRS EscrowExchange™ for early escrow liquidity.For more information visit: www.shareholderrep.com2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. About SRS | 2 www.shareholderrep.com
  3. 3. About this Study§  The Deal Terms Study Sample The 2012 SRS Deal Terms Study analyzes 342 private-target acquisitions on which SRS served as the shareholder representative from the start of 2009 through the end of Q3 2012 (the 2011 Study analyzed deals from the start of 2008 through the end of Q3 2011). As used herein, “2012 deals” includes deals closing through the end of Q3 in the 2012 calendar year. Note that data points on past years may differ slightly from previous SRS Deal Terms Studies due to (i) changes in presentation from study-over-study to year-over-year, (ii) deals added in Q4 2011 that were not reported in the 2011 Study, and (iii) reporting medians rather than averages. Sample sizes are larger for more recent years as a result of the growth of SRS. •  342 Acquisitions analyzed •  $55.3 Billion in stated deal value •  Aggregate data on 200+ deal terms •  $42.7 Billion paid at closing •  301 Mergers, 13 asset purchases and 28 stock •  $4.9 Billion held in escrow purchases •  $7.7 Billion in defined earn-out consideration, plus •  82 Deals with earn-outs uncapped potential payments§  New Data in the 2012 Study Time to exit, equity capital investment data*, termination fees, conflict waivers and more detailed analyses of carveouts to indemnification caps and survival periods have been included for the first time in the 2012 Study.§  Why Our Study is Unique As shareholder representative, SRS has access to seller management, shareholders, and all deal documents, and manages all post-closing matters. Most information from these sources is not publicly available or reported in other studies. Our goal is to arm deal professionals who negotiate and advise on private-target transactions with robust, reliable sources of information that can’t be found elsewhere.* Throughout this study, we rely primarily upon S&P Capital IQ™ for equity capital investment data.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 3 www.shareholderrep.com
  4. 4. Table of Contents§  Overview...............................................................................5 •  Legal Opinions (Non-Tax)...............................................49 •  Key Findings....................................................................5 •  Appraisal Rights............................................................50 •  Seller Industries..............................................................6 §  Indemnification.....................................................52 •  Transaction Values..........................................................7 •  Stand-Alone Indemnities................................................53 •  Years to Exit...................................................................8 •  “Sandbagging”..............................................................54 •  Transaction Values as Multiples of Return on Equity •  Survival/Time to Assert Claims......................................55 Capital Invested...............................................................9 •  Types of Losses Covered................................................59 •  Closing Consideration Trends.........................................10 •  Baskets.........................................................................60 •  Sellers’ Financings and Earnings...................................11 •  Materiality Scrape.........................................................67§  Financial Provisions............................................................13 •  Caps.............................................................................68 •  Post-Closing Purchase Price Adjustments......................14 •  Reductions Against Buyer’s Indemnification Claims........72 •  Earn-outs (Non-Life Sciences)........................................19 •  Indemnification as Exclusive Remedy…..........................73 •  Management Carveouts.................................................23 •  Escrows/Holdbacks.......................................................74 •  Treatment of Options (Non-Life Sciences)......................24 •  Special Escrows............................................................77§  Pervasive Qualifiers............................................................25 §  Dispute Resolution.............................................................78 •  Definition of Material Adverse Effect..............................26 •  Waiver of Jury................................................................79 •  Knowledge Standards....................................................31 •  Alternative Dispute Resolution.......................................80§  Seller’s Representations, Warranties, and Covenants..........32 §  Termination Fees................................................................82 •  “No Undisclosed Liabilities” Representation...................33 §  Glossary.............................................................................84 •  “Compliance with Laws” Representation........................34 •  “10b-5” and “Full Disclosure” Representations...............35 •  “No Other Representations” and “Non-Reliance” Reps....37 •  Covenants.....................................................................38§  Closing Conditions..............................................................42 •  Accuracy of Seller’s Representations..............................43 •  “Material Adverse Change” Condition.............................47 •  No Legal Proceedings Challenging the Transaction.........482012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. TOC | 4 www.shareholderrep.com
  5. 5. Key Findings§  Deal sizes: although the median deal size* rose slightly to $75 million in 2012 from $70 million in 2011, deals $50 million or less grew to 42% of deals in 2012, up from 33% in 2011.§  Seller financial performance: acquisitions remain heavily weighted toward Sellers with revenue, and Sellers in the aggregate continue to show improved earnings since 2009. Coupled with a slight increase in Seller-favorable terms generally, data suggests that some degree of market leverage is returning to Sellers that have survived the downturn even as M&A activity remains deliberate.§  Cash vs. stock deals: cash is still king in M&A as long-term interest rates decline.§  Earn-outs: usage of financial metrics (revenue and earnings) and multi-metric achievement tests is declining, accompanied by a shift toward longer earn-out periods.§  Indemnification trends: median R&W survival periods and escrow sizes have leveled off at 18 months and 10–12% of transaction values, respectively, since 2009. Other terms are increasingly Seller- favorable, for example, an increase in available offsets against Buyer indemnification claim amounts and requiring that claims exceed a minimum threshold.§  Alternative dispute resolution (“ADR”): mandatory ADR such as mediation and arbitration has steadily declined since 2010, down to 26% of deals in 2012 from 41% in 2010.§  Post-closing expense funds: the median size as a percentage of the indemnification escrow continues to trend upward, at 2.08% in 2012.* Including escrowed amounts but not potential earn-out consideration.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 5 www.shareholderrep.com
  6. 6. Seller IndustriesSubset: new deals since the 2011 Study Other Telecommunications 1% 4% Biopharmaceuticals 10% Software 22% Business products and services 15% Semiconductors Computers and 1% peripherals Networking equipment 5% 1% Consumer products Medical devices and services and equipment 3% 7% Electronics and instrumentation Media and 4% entertainment Health care 6% services Industrial 3% IT services and energy 13% 5%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 6 www.shareholderrep.com
  7. 7. Transaction Values*Subset: new deals since the 2011 Study More than $750MM 3% >$250MM to $750MM $25MM or less 13% 19% >$100MM to $250MM 20% >$25MM to $50MM 23% >$50MM to $100MM 22%* “Transaction values” as used herein includes escrowed amounts but does not include potential earn-out condisderation.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 7 www.shareholderrep.com
  8. 8. Years to Exit Subset: new deals since the 2011 Study Cumulative % of deal set Exits 18 100% 16 14 75%Number of exits 12 % of deal set 10 50% 8 6 25% 4 2 0 0% 0 2 4 6 8 10 12 14 16 18 20 22 24 Years from founding to exit Years to exit Equity financing rounds to exit Equity capital invested Median: 7 Median: 3 Median: $28MM Average: 9 Average: 3 Average: $36MM 2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 8 www.shareholderrep.com
  9. 9. Transaction Values* as Multiples of Return on Equity CapitalInvestedSubset: new deals since the 2011 Study with equity capital investment data available 30 27Multiples of return on equity capital invested 24 21 §  If all equity capital is invested one year after 18 founding, a 3.8x return seven years after founding 15 yields a 25% IRR**. 12 9 Average return: 8.0x 6 Median return: 3.8x 3 0 Deal by deal* Transaction values include escrowed amounts but do not include potential earn-out consideration.** Assumes equity capital is invested en bloc, disregarding staged investments and liquidation preferences.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 9 www.shareholderrep.com
  10. 10. Closing Consideration TrendsConsideration type All-cash deals vs. long-term interest rates All cash All stock Cash/stock combo All-cash deals Long-term Real Rate (average) 100% 2.5% 19% 12% 11% 13% 2.24% 86% 85% 84% 4% 3% 2% 84% 86% 85% 75% 2.0% 6% 75% 1.72% 75% 1.36% 1.5% 50% 1.0% 25% 0.5% 0.22% 0% 0.0% 2009 2010 2011 2012 2009 2010 2011 2012* The Long-term Real Rate (Average) is the unweighted average of bid real yields on all outstanding TIPS with remaining maturities ofmore than 10 years and is intended as a proxy for long-term real rates.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 10 www.shareholderrep.com
  11. 11. Sellers’ Financings and EarningsEquity capital investment rounds at exit Sellers with revenue and positive EBITDA Subset: non-life sciences deals* Average Median4.0 Sellers with revenue Sellers with positive EBITDA 100% 100% 98% 98% 97%3.5 3.3 3.3 75% 3.13.0 3.0 3.0 3.0 3.0 50% 38% 31% 28%2.5 19% 25%2.0 0% 2009 2010 2011 2012 2009 2010 2011 2012* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization andthus without meaningful chances of having revenue or positive EBITDA at the time of sale.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 11 www.shareholderrep.com
  12. 12. Sellers’ Financings and EarningsMedian Seller EBITDA, last 12 months (non-life sciences deals*) 2009 2010 2011 2012 $0 ($1,311,359)($2,000,000) ($2,150,302) ($3,312,449)($4,000,000) ($5,170,210)($6,000,000)* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization andthus without meaningful chances of having revenue or positive EBITDA at the time of sale.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 12 www.shareholderrep.com
  13. 13. Financial Provisions2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 13 www.shareholderrep.com
  14. 14. Post-Closing Purchase Price Adjustments§  Post-closing purchase price adjustment example “The ‘Adjustment Amount’ (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Working Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer by Buyer to an account specified by Seller.” “‘Working Capital’ as of a given date shall mean the amount calculated by subtracting the current liabilities of Seller as of that date from the current assets of Seller as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the ‘Initial Working Capital’) shall be deemed Two Million Dollars ($2,000,000).”2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 14 www.shareholderrep.com
  15. 15. Post-Closing Purchase Price AdjustmentsAdjustment provision included Adjustment metrics* (subset: includes adjustment)100% 2012 2011 80% 71% 76% Working capital 74% 75% 37% Cash 69% 36% 49% 50% 54% Debt 32% 9% Other** 14% 25% 5% Assets 8% 1% Earnings 0% 0% 2009 2010 2011 2012* 51% of post-closing purchase price adjustments in 2012 deals were based on more than one metric.** Does not include post-closing adjustments for unpaid transaction expenses.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 15 www.shareholderrep.com
  16. 16. Post-Closing Purchase Price Adjustments:Working Capital Excludes Tax-Related ItemsSubset: 2012 deals with working capital adjustments Tax-related items excluded from calculation 42%§  Tax exclusion example “‘Adjusted Working Capital’ means current assets minus current liabilities; provided, however, that ‘Adjusted Working Capital’ excludes from current assets all tax assets and excludes from current liabilities all tax liabilities.” Tax-related items not excluded from calculation 58%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 16 www.shareholderrep.com
  17. 17. Post-Closing Purchase Price Adjustments:Methodology for Preparation of Closing Balance SheetSubset: deals with post-closing purchase price adjustments 2010 2011 2012 58% 58% 54% 27% 19% 16% 15% 15% 11% 10% 9% 6% GAAP GAAP consistent with past Other* Silent practices* “Other” methodology most commonly used was GAAP as modified by the principles and changes set forth on a schedule.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 17 www.shareholderrep.com
  18. 18. Post-Closing Purchase Price Adjustments:Thresholds and Separate EscrowsSubset: 2012 deals with post-closing purchase price adjustmentsAdjustment only if threshold exceeded Source of payment if buyer-favorable adjustment Payment not from Yes indemnity escrow 13% 5% True-up from Separate No separate indemnity escrow escrow escrow 17% 83% 95% No 87%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 18 www.shareholderrep.com
  19. 19. Earn-outs (Non-Life Sciences*)Subset: non-life sciences dealsEarn-out included Earn-out metrics**20% 18% 2012 2011 17% 14%15% 60% Revenue 12% 64%10% 5% 2009 2010 2011 2012 20% Earnings/EBITDA 36%§  Earn-outs are much more common in SRS’s life sciences deals than other types of deals 33% •  82% of biopharmaceutical deals Other*** •  84% of medical device deals 36% •  14% of all other SRS deals* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.** Earn-outs can include more than one metric, such as revenue and earnings.*** Examples: unit sales, product launches, divestiture of assets.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 19 www.shareholderrep.com
  20. 20. Earn-outs (Non-Life Sciences*) Subset: non-life sciences deals with earn-outsMedian earn-out potential as percentage of closing payment** Earn-out length*** (2012 median: 24 months)50% 2012 2011 38% 20%40% 1 year or less 36% 55% 33% >1 to 2 years30% 18% 29% 13% >2 to 3 years 9%20% 23% 20% >3 to 4 years 0%10% 13% >4 to 5 years 18% 0% 2009 2010 2011 2012 0% >5 years 0% * For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study. ** Calculated as the sum of potential earn-out payments over the amount paid at closing (including escrowed amounts). *** Measured by the date the latest earn-out period ends. 2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 20 www.shareholderrep.com
  21. 21. Earn-outs (Non-Life Sciences*):Covenants, Acceleration and OffsetsSubset: 2012 non-life sciences deals with earn-outs Not Not Not Silent included included included 27% 94% 87% 53% Express No 6% Express Yes 67% Included 47% Included Included 6% 13% Covenant to run business in Covenant to run business to Earn-out accelerates (fully or Buyer can offset indemnity accordance with Sellers past maximize earn-out payments partially) on change in control claims against future earn-out practices of earn-out assets** payments* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.** Generally subject to exceptions, such as if the subsequent buyer assumes the earn-out obligations.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 21 www.shareholderrep.com
  22. 22. Earn-outs (Non-Life Sciences*): Additional ProvisionsSubset: non-life sciences deals with earn-outsEarn-out is not a security Disclaimer of fiduciary relationship Included Included 13% 13% Not Not included included 87% 87%§  Example provision intended to ensure §  Example disclaimer of fiduciary earn-out is not treated as a security relationship “The right of Seller to a portion of the Earn-out “Nothing in this Agreement creates a fiduciary duty Amount, if any, shall not be represented by a on the part of Buyer to Seller in respect of the Earn- certificate or other instrument, shall not represent an out.” ownership interest in Buyer or the Business and shall not entitle Seller to any rights common to any holder of any equity security of Buyer.”* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 22 www.shareholderrep.com
  23. 23. Management Carveouts: Frequency and Size§  A “management carveout” here is a cash payment triggered by an acquisition that guarantees Seller’s management a portion of the deal consideration at closing when such participants would otherwise receive little or nothing in respect of their equity ownership, usually due to liquidation preferences. Because transaction bonuses often differ from management carveouts in size, structure and timing of adoption, they are not included below.Deals including a management carveout Median size as a percentage of transaction value*50% 11.0% 10.0% 10.0% 10.0%40% 9.0%30% 27% 8.0% 8.6% 20% 19%20% 7.0%10% 6.0% 0% 5.0% 2010 2011 2012 2010 2011 2012* Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. “Transactionvalue” includes escrowed amounts but does not include potential earn-out consideration.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 23 www.shareholderrep.com
  24. 24. Treatment of Options (Non-Life Sciences*):Contribution, Acceleration and AssumptionSubset: non-life sciences dealsContribution and acceleration** Assumption of options by Buyer Options contribute to escrow Options assumed Options not assumed Full acceleration of vesting*** 87% 73% 61% 72%100% 74% 74% 75% 63% 56% 50% 56% 49% 44% 39% 25% 34% 28% 27% 13% 0% 2009 2010 2011 2012 2009 2010 2011 2012* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.** Excludes deals where option-holders received no consideration.*** Excludes deals where options were assumed by the Buyer; measures acceleration of employee options only.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 24 www.shareholderrep.com
  25. 25. Pervasive Qualifiers2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 25 www.shareholderrep.com
  26. 26. Definition of Material Adverse Effect:Prospects IncludedSubset: deals with MAE defined* Declining use of “prospects”§  Example term Prospects included Prospects not included “‘Material Adverse Effect’” means any result, occurrence, fact, change, event or 75% 76% 85% 87% effect that has a materially adverse effect on the business, assets, liabilities, prospects, capitalization, condition (financial or other), or results of operations of Seller.” 25% 24% 15% 13% 2009 2010 2011 2012* “Material Adverse Effect” or “Material Adverse Change” was defined in 98% of deals.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 26 www.shareholderrep.com
  27. 27. Definition of Material Adverse Effect:Forward-Looking LanguageSubset: 2012 deals with an MAE definition with forward-looking language Forward-looking MAE details§  Example term “‘Material Adverse Effect’ means any result, Other** occurrence, fact, change, event or effect that 17% "Could be" 19% has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Seller.”§  96% of deals had forward-looking language* "Would be" 64%* Includes deals where the MAE definition did not include forward-looking language, but forward-looking language was predominantly usedin conjunction with the use of the defined term in the body of the agreement.** Agreements in the “Other” category used a combination of “could” and “would” or some other forward-looking standard.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 27 www.shareholderrep.com
  28. 28. Definition of Material Adverse Effect: CarveoutsSubset: 2012 deals with MAE defined Deals with carveouts§  Example term “‘Material Adverse Effect’” means any No carveouts 6% change . . . except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions.” Definition includes carveouts 94%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 28 www.shareholderrep.com
  29. 29. Definition of Material Adverse Effect: CarveoutsSubset: MAE definition has carveoutsCarveout frequency 2010 2011 2012 97% 96% 92% 92% 86% 87% 85% 82% 80% 80% 79% 79% 78% 77% 72% 71% 71% 70% 62% 63% 58% 59% 56% 50% Actions Announcement Changes in Changes in law Economic Financial Industry War or required by of deal accounting conditions market conditions terrorism agreement standards downturn2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 29 www.shareholderrep.com
  30. 30. Definition of Material Adverse Effect:Carveouts Qualified by Disproportionate EffectSubset: MAE definition has carveouts Disproportionate effect details (2012 deals)§  Example term No carveouts “‘Material Adverse Effect’ means any qualified by change . . . except to the extent resulting disproportionate effect from (A) changes in general local, domestic, 10% foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions (provided that such event, change, or action does not affect Seller in a At least one substantially disproportionate manner).” carveout qualified by disproportionate effect 90%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 30 www.shareholderrep.com
  31. 31. Knowledge Standards Knowledge definition details (2012 deals) Not defined Actual 4% 13%§  Actual knowledge Constructive “‘Knowledge’ means the actual knowledge 83% of the directors and officers of Seller.” Subset: constructive knowledge*§  Constructive knowledge “‘Knowledge’ means the actual knowledge Reasonable or due inquiry 82% of the directors and officers of Seller and the Reasonable or due inquiry of knowledge that such directors and officers knowledgeable persons 36% would have after due inquiry.” Other form of reasonable or 11% due inquiry Role-based constructive 19% knowledge Other form of constructive 17% knowledge "Constructive knowledge" not 1% defined (silent)* 49% of 2012 deals include more than one constructive knowledge element, e.g., a due inquiry requirement as well as role-based deemed knowledge.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 31 www.shareholderrep.com
  32. 32. Seller’s Representations, Warranties and Covenants2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 32 www.shareholderrep.com
  33. 33. “No Undisclosed Liabilities” Representation* Party favored by definition§  Example Buyer-favorable formulation Buyer Seller “Seller has no liability except for liabilities reflected 22% 39% 39% 40% or reserved against in the Balance Sheet or the 88% Interim Balance Sheet and current liabilities incurred 61% 61% 60% in Seller’s ordinary course of business since the date of the Interim Balance Sheet.”§  Example Seller-favorable formulation 2009 2010 2011 2012 “Seller has no liability of the nature required to be disclosed in a balance sheet prepared in accordance Representation knowledge-qualified with GAAP [or which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect], except for liabilities 4% reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Seller’s ordinary course of business since the date of the Interim Balance Sheet.” 1% 2011 2012* All 2012 deals included this rep. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 33 www.shareholderrep.com Covenants
  34. 34. “Compliance with Laws” Representation*§  Example representation “To the Seller’s knowledge, the Business has been and is being conducted in compliance with all applicable laws.”“Compliance with laws” details (2012 deals) 81% 80% 12% 5% Complete rep is knowledge Covers past and present Includes notice of investigation Includes notice of violation qualified compliance* All 2012 deals included this rep. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 34 www.shareholderrep.com Covenants
  35. 35. “10b–5” and “Full Disclosure” Representations§  Example “10b–5” representation Inclusion of reps (2012 deals) “No representation or warranty or other statement made by Seller in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the Neither rep "10b-5" rep certificates delivered pursuant to Section 2.7(a) or 46% only* otherwise in connection with the Contemplated 47% 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.”§  Example “full disclosure” representation “Seller does not have Knowledge of any fact that has specific application to Seller (other than general Both "10b-5" "Full disclosure" economic or industry conditions) and that may and "full rep only* materially adversely affect the assets, business, disclosure" 1% prospects, financial condition or results of operations reps* of Seller that has not been set forth in this 6% Agreement or the Disclosure Letter.”* Does not include reps that apply only to the shareholder information statement (and not the acquisition agreement). Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 35 www.shareholderrep.com Covenants
  36. 36. “10b–5” and “Full Disclosure” Representations:Knowledge QualifiersSubset: all deals since 2010Subset: “10b–5” rep only Subset: both “10b–5” and “full disclosure” reps Knowledge Only "full Neither rep qualified disclosure" rep knowledge 19% knowledge qualified qualified 27% 61% Both reps knowledge qualified 8% Not knowledge Only "10b-5" qualified rep knowledge 81% qualified 4%Note: Two deals included “full disclosure”-only reps, and both were knowledge qualified. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 36 www.shareholderrep.com Covenants
  37. 37. “No Other Representations” and “Non-Reliance” Reps§  “No other representations” example Inclusion of reps (2012 deals) “Buyer acknowledges that Seller has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in this Article III.” "No other reps" only 32%§  “Non-reliance” example Neither “Buyer is not relying and has not relied on any 48% representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties provided in Both "Non- this Article III.” 19% reliance" only 1% Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 37 www.shareholderrep.com Covenants
  38. 38. Covenants: Seller’s Duty to Notify Buyer of Pre-Closing Breachesof Representations and WarrantiesSubset: 2012 dealsDeals including a duty to notify Buyer’s indemnification rights limited for notified matters No express Yes** duty 5% 13% Express duty to notify No 87% 95%* Sample excludes “sign-and-close” deals.** Such deals generally eliminate Buyer’s right to indemnification for the updated matter if Buyer chooses to waive the relevant closingcondition or does not exercise an existing or newly provided right to terminate the transaction because of the update. Includes dealswhere Buyer and Seller agree to negotiate effects on indemnification rights in good faith. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 38 www.shareholderrep.com Covenants
  39. 39. Covenants: Seller’s Duty to Notify Buyer of Breaches ofCovenants* Seller expressly required to notify Buyer of breaches of covenants (2012 deals) No 20% Yes 80%* Sample excludes “sign-and-close” deals. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 39 www.shareholderrep.com Covenants
  40. 40. Covenants: No-Shop/No-Talk§  Example no-shop/no-talk “Between the date of this Agreement and the Closing Date, Seller shall not . . . (i) solicit, initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition Proposal or (ii) participate in any discussion, conversation, negotiation or other communication regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.”§  Example fiduciary exception “Notwithstanding the foregoing . . . the Seller Board may withhold, withdraw, amend or modify its recommendation to the Selling Shareholders if it determines in good faith by resolution duly adopted, after consultation with outside legal counsel, that it is required to do so in order to comply with its fiduciary duties to the Selling Shareholders under applicable law.” Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 40 www.shareholderrep.com Covenants
  41. 41. Covenants: No-Shop/No-Talk* Details** Covenant includes fiduciary exception 14% No-shop/no-talk No-shop/no-talk No covenant not included covenant included fiduciary 5% 95% exception 86%* Sample excludes “sign-and-close” deals.** Fiduciary exception subset excludes stock-purchase deals. Representations, Warranties and2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 41 www.shareholderrep.com Covenants
  42. 42. Closing Conditions** This section’s analyses exclude “sign-and-close” deals.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 42 www.shareholderrep.com
  43. 43. Accuracy of Seller’s Representations (Timing):When Must They Be Accurate?§  At signing only Accuracy: timing (2012 deals) “Each of the representations and warranties 76% made by Seller in this Agreement shall have been accurate in all respects as of the date made.”§  At closing only “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.”§  At signing and closing 24% “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the date made and as of the Closing Date as if made on the Closing Date.” 0% At signing only At closing only Both2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 43 www.shareholderrep.com
  44. 44. Accuracy of Seller’s Representations (Materiality):How Accurate Must They Be?§  Accurate “in all respects” Accuracy: materiality (2012 deals) “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in MAE "In all material respects" "In all respects" all respects as of the Closing Date as if made on the Closing Date.” 6% 8%§  Accurate “in all material respects” “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all material respects as of the Closing Date as if made on the Closing Date.” 68% 72%§  MAE qualification “Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, 26% 20% do not have and could not reasonably be expected to have a Material Adverse Effect.” At signing At closing2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 44 www.shareholderrep.com
  45. 45. Accuracy of Seller’s Representations (Materiality):MAE Qualifier with Capitalization Representation CarveoutSubset: 2012 deals with MAE qualifiers in the “accuracy of reps” condition§  Example capitalization carveout Carveout applies “The representations and warranties set forth in Section 3.3 (Capitalization) shall be accurate in all respects as of the Closing Date 64% as if made on the Closing Date. Each of the 60% other representations and warranties made by Seller in this Agreement shall be accurate as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect.” At signing At closing2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 45 www.shareholderrep.com
  46. 46. Accuracy of Seller’s Representations (Materiality):Materiality ScrapeSubset: 2012 deals with materiality or MAE qualifiers in the “accuracy of reps”condition§  Example materiality scrape 87% 85% “Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties, all materiality, “Material Adverse Effect” and similar qualifications contained in such representations and warranties shall be disregarded).” Included as of signing Included as of closing2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 46 www.shareholderrep.com
  47. 47. “Material Adverse Change” Condition§  “Stand-alone” MAC condition MAC condition details (2012 deals) “Since the date of this Agreement, there has not been any Seller Material Adverse Neither Change.” 3% Stand-alone condition§  “Back-door” MAC condition only 27% The Agreement includes an “Absence of Changes” representation: •  “Section 3.6 Absence of Changes. (i) Since the Balance Sheet Date, there has not been any Seller Material Adverse Change.” Both and includes a condition “bringing down” 57% Back-door the accuracy of Seller’s representations condition only and warranties: 13% •  “The representations and warranties made by Seller in this Agreement shall be true and correct in all respects when made and at the Closing Date as if made on the Closing Date.”2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 47 www.shareholderrep.com
  48. 48. “No Legal Proceedings” Condition 2012 deals Governmental legal proceedings only Not Condition 36% included included§  Example condition 18% 82% Any legal “There will not be pending [or proceeding 64% threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or any Person] challenging or 2011 deals seeking to restrain or prohibit the consummation of the transactions Governmental contemplated herein.” legal proceedings only Not Condition 34% Included Included 20% 80% Any legal proceeding 66%2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 48 www.shareholderrep.com
  49. 49. Legal Opinions (Non-Tax) of Seller’s CounselOpinion required as a condition to closing Yes* No 37% 45% 32% 50% 68% 63% 55% 50% 2009 2010 2011 2012* Includes opinions delivered pursuant to both stand-alone and “closing deliverables” conditions.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 49 www.shareholderrep.com
  50. 50. Appraisal Rights ConditionSubset: mergersAppraisal rights condition included Drafting details Subset: 2012 deals with condition included Yes* No Minimum Appraisal rights 10% 16% 35% 40% shareholder "not available" to approval only* percentage of 90% 17% shareholders 84% 27% 65% 60% Appraisal rights Appraisal rights "neither available "not exercised" by to nor exercised percentage of by" percentage of shareholders shareholders 37% 19% 2009 2010 2011 2012* Includes deals without an express appraisal rights condition but with a condition specifying a minimum percentage of shareholder votes(on a fully-diluted basis) approving the merger, effectively waiving appraisal rights.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 50 www.shareholderrep.com
  51. 51. Appraisal Rights Condition: ThresholdsSubset: 2012 mergers with an appraisal rights conditionCondition threshold details Up to 3% >3% to 8% >8% to 10% More than 10% Appraisal rights "not available" to percentage of shareholders 14% 29% 50% 7% Appraisal rights "not exercised" by percentage of shareholders 26% 47% 26% Appraisal rights "neither available to nor exercised by" percentage of 10% 60% 20% 10% shareholders Minimum shareholder approval only* 56% 22% 22%* These deals did not include an express appraisal rights condition, but did include a condition specifying a minimum percentage ofshareholder votes (on a fully diluted basis) approving the merger, effectively waiving appraisal rights.2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 51 www.shareholderrep.com
  52. 52. Indemnification2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 52 www.shareholderrep.com

×