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Insights Newsletter Autumn 2011.Final[1]


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Newsletter Autumn 2011.Final[1]

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Insights Newsletter Autumn 2011.Final[1]

  1. 1. ®A Newsletter from Shumaker, Loop & Kendrick, LLP Autumn 20116 Alternative M&A Methods in 8 IT in the Current M&A Market 12 M&A: Foreign Corrupt 16 Cloud Computing 18 Employment Issues in Mergers & Acquisitions Distressed Settings Practices ActDealing with Uncertainty inMergers & Acquisition Transactions ed itor ’s note ver the last two years, since the nadir of the financial crises, M&A Recently, Shumaker has seen an increase in transactions involving mergers, acquisitions, activity has been on the rise. In sales of substantially all assets, divestitures, 2010, total U.S. M&A activity rose and joint ventures (collectively, “M&A”). to 1,933 deals from 1,116 deals in Additionally, according to The Wall Street 2009, an increase of 73%. Thus Journal (p. C1, Oct. 24, 2011), bank lending far in 2011, overall U.S. M&A deal has returned to M&A transactions. Therefore, volume remains healthy, with nearly we have devoted our Autumn 2011 Insights 1,000 closed transactions in the first Newsletter to highlight current M&A topics By Julio Esquivel potentially of interest to our clients. half of 2011, up nearly 30% fromthe prior year period. This trend should continue, RegINA JOSephgiven the unprecedented amount of cash on thebalance sheets of many corporate buyers, limitedopportunities for organic growth, the increasing As a result, there are significant risks inavailability of leverage (at historically low interest attempting to buy or sell a business underrates), and the need for hedge funds to invest current market conditions. Will the buyer betheir so-called “dry powder” or liquidate their able to obtain the financing required to pay theportfolio investments as a result of their investment purchase price? What if there is another marketmandates. downturn that negatively impacts the seller’s business? Will pre-closing buyer’s remorse By Ben HananVolatility in the marketplace require renegotiation or termination of the deal?Nevertheless, significant, ongoing financial What if the seller hasn’t fully disclosed trends orconcerns remain, led by fears of a European debt events that will negatively impact the businesscrisis, intransigent high unemployment, a glut of in the future? How do buyers and sellers hedgeforeclosures, the potential for a double-dip U.S. their bets and protect their interests?recession, the recent downgrade of U.S. debt, andour seemingly dysfunctional political system. Is it Negotiating M&A purchase agreements is, at itsany wonder the markets overanalyze every gesture core, the allocation of risks among the parties toof Fed Chairman Ben Bernanke and jump at the the transaction. A full discussion of the variousslightest rustle? Thus, even though U.S. banks interwoven and complex considerations that gotoday are better capitalized than they were in 2008 By Greg Yadley into that allocation is beyond the scope of thisand corporations are sitting on unprecedented article. Instead, we highlight below five hotamounts of cash and GDP continues to grow (albeit topics to which buyers and sellers should payat a slow pace), the credit markets and, hence, the particular attention as they strike deals in thisM&A environment, remain highly volatile. uncertain environment. continued on next page >
  2. 2. don’t skip the First step “those in a confidential relationship agreements among the parties.” If the earnout amount be paid immediatelyUsually, M&A discussions begin with [AmeriPark]” and that in any letter of intent or purchase agreement rather than undertaking the riskswith the signing of a confidentiality event, discussions with Greenfield neglects to include, or contains only a There is a natural tension between related to business performance underagreement (sometimes called a non- should have been anticipated since perfunctory, confidentiality provision, the new ownership. the proposed Gemini financing it may be deemed to have superseded the value a seller places on itsdisclosure agreement or “NDA”).Too often, the parties gloss over the contemplated a redemption of the NDA, leaving the parties without company and how much a buyer is hedGinG the Betimportance of these agreements, Greenfield’s stake in AmeriPark. the benefit of the NDA’s protections. willing to pay for it. Another way for buyers and sellers toconsidering them boilerplate, perhaps bridge the gap on the purchase priceeven signing the form provided by Regardless of whether you agree BridGinG the pUrchase price Gap while allowing the buyer to hedgethe other party without reviewing it with the Court’s ruling, the case There is a natural tension between the its bet is to provide for a “holdback.”with counsel. If the deal successfully highlights the need to carefully value a seller places on its company A “holdback” is simply the negotiatedcloses, this will likely be a non-issue. craft confidentiality agreements. and how much a buyer is willing to portion of the purchase price which isBut when a party walks away from With whom can the parties share pay for it. This tension is elevated in an placed in escrow at closing and heldthe negotiation table, a confidentiality confidential information? How is uncertain economic environment, when until the terms of the escrow haveagreement may be all the other party confidential information defined? no one knows what tomorrow may been satisfied. Typically, the holdbackhas to protect its interests. Are there any exceptions? What are bring. An “earnout” is designed to serves to ensure that the buyer will be the permitted uses of confidential bridge this gap by providing additional able to get a portion of the purchaseTake, for instance, a very recent case information? Should the agreement compensation to the seller if certain price returned to it if (a) there is a post-out of Atlanta, where Gemini, a private also include, among other things, a post-closing targets are met. closing purchase price adjustmentequity firm, signed a term sheet to non-solicitation provision (preventing (e.g., an adjustment based on afinance the acquisition by AmeriPark the other party from soliciting your Over the last few years, earnouts have requirement that the seller’s balanceof a competitor (Mile Hi). The employees, customers, vendors, become increasingly important in M&A sheet at closing meet certain minimumterm sheet included exclusivity and and even shareholders), a standstill transactions. According to JP Morgan, are well advised to focus on the details consideration. A cap sets a limit on requirements), or (b) the seller isconfidentiality provisions pursuant agreement (preventing the seller the value of earnouts as a percentage of earnouts during the negotiation the total earnout payable, which is required to indemnify the buyer post-to which AmeriPark “agree[d] not to from soliciting other bids or pursuing of the total deal value rose to a new process. While the structure of an important to protect the buyer if the closing (e.g., for claims based on adiscuss this opportunity or reach any other sales opportunities during the high of 41% in 2011, compared with earnout may vary widely, some of earnout is based, for example, on a breach of the seller’s representationsagreement with any person or entity restricted period), or a provision 37% in 2010 and 25% in 2001. This is the more important issues to address multiple of EBITDA. Particularly and warranties contained in theregarding financing for this Transaction restricting trading in securities due, in part, to the uncertain economic include: in uncertain times, financing for purchase agreement). Any portion ofor the pursuit of any sale or major (particularly important if one party environment, but also due to the fact • earnout targets (these commonly the earnout payment may not be the holdback that is not returned to theother financing.” During the exclusivity is a public company)? Depending on that business valuations are increasing include gross sales, net income and available, or existing loan covenants buyer generally is released to the sellerperiod, AmeriPark abandoned the your role in the transaction and the while less debt financing is available EBITDA, but earnouts can also be might create a conflict between the at the end of the holdback period.negotiations and began talks with one facts and circumstances, you may wish to provide the cash to pay such higher based on non-financial targets); buyer’s obligations to the sellerof its largest shareholders (Greenfield), to include an expansive or narrower prices. We expect that earnouts will • earnout period (the additional and to the buyer’s bank. A buyout Having an escrow holdback reduceswho was also the sole shareholder of definition of confidential information, continue to be a significant component payment could be a one-time event option generally entitles the buyer the buyer’s risk and, thus, can serveMile Hi, eventually completing the restrict the range of permitted uses of of deal compensation, at least in the or stretched over multiple years; to pay a specified amount to satisfy to increase the purchase price to theacquisition using seller financing and the information, or insist on some or near term. the period is sometimes tied to an any remaining earnout payment seller. Of course, the seller is deprivedtotally cutting Gemini out of the deal. many additional protective provisions. employment or non-compete period); obligations. This may become of the use of the holdback funds duringGemini sued AmeriPark for breach Conceptually, earnouts seem • structure of the earnout (which could important, for example, if the buyer the escrow period and the holdbackof the exclusivity and confidentiality Once the parties have carefully straightforward. If the target company be a fixed amount or based on a decides to sell its business prior may tend to shift the parties’ respectiveprovisions arguing that the term “any crafted their NDA, they should be achieves certain targets following the multiple, percentage, or some other to the end of the earnout period, leverage in any post-closing purchaseperson or entity” was unambiguous careful not to inadvertently supersede sale, the seller “earns” more money. formula); and since potential buyers may not be price adjustment or indemnificationand clearly covered Greenfield. or render it void when they enter But like so many things, the devil is in • caps, early buyout provisions, and interested in buying a company with dispute. Accordingly, the terms ofThe court disagreed, noting that into subsequent letters of intent or the details, resulting in a high degree acceleration provisions (devices to future earnout payment obligations, the holdback, including the amount,an exception to the confidentiality definitive purchase agreements. Often of pre-signing negotiations and post- limit the parties’ ultimate monetary particularly if they are uncapped. duration, and specific purpose andprovision contemplated that the those agreements include a provision closing disputes between buyers and risks). Conversely, an acceleration provision terms of the holdback are often heavilytransaction could be discussed with that states “this agreement sets forth sellers. Parties to M&A transactions generally requires the buyer to negotiated. the entire understanding of the parties In many deals, the focus is on the immediately pay a fixed earnout continued on next page > hereto with respect to the subject first three items above, but equal amount if certain specified events occur. matter hereof and supersedes all prior attention should be given to the fourth For example, if the buyer undergoes a change of control after closing, the seller may prefer that a 3
  3. 3. According to JP Morgan, based on a neGotiatinG the oUts that Among the concessions that buyers aGreeinG Up Front on thestudy of 250 publicly-disclosed M&A let a BUyer walk From a deal may attempt to obtain from sellers penalty For FailinG to closetransactions in 2010: Generally, once the parties sign an M&A are the following: Because no deal is guaranteed to close, Unfortunately, buyers and sellers• the median percentage of the agreement they are bound to close the • Limiting pro-seller exclusions to the parties should carefully consider often fail to pay sufficient attention to purchase price placed into a holdback transaction if the stated conditions to the definition of MAE (typical pro- their remedies should the other party escrow was 9%; closing are satisfied. Common closing seller exclusions include changes fail to close, whether as a result of a non- the ramifications of a failure to close• the median duration of the holdback conditions include receipt of financing, in law or GAAP and general willful breach (e.g., the buyer’s inability when negotiating M&A transactions. escrow was 18 months; third-party consents, and shareholder economic downturns that impact to obtain financing notwithstanding• among transactions in which approval. However, during the pre- the seller’s industry as a whole good faith efforts) or willful breach (e.g., representations and warranties closing period (i.e., the period between and not the seller individually); buyer’s remorse). As was evidenced survived closing, 83% were the signing of the M&A agreement • Shifting the burden of proof to by the wave of busted deals during the supported by a holdback escrow to and the closing), there is a risk that the seller (which requires that the recent financial crisis, this is particularly mitigate buyer risk; and some event may arise that materially seller establish that no MAE has important to sellers in uncertain• 24% of escrow agreements called for negatively impacts the business of the occurred, or at least that one of the economic environments where multiple escrow accounts to be used seller, a so-called “Material Adverse MAE exclusions is applicable); financing is uncertain and bad economic for distinct purposes (one for general Event” or “MAE.” Examples of MAEs • Making the MAE forward-looking news can easily spook buyers and their indemnification purposes and the include the loss of the seller’s largest (by revising the definition of an lenders and investors. other for purchase price adjustments). customer or a fire, flood, or other force MAE so that it includes “any majeure event that significantly impacts event which results or is reasonably Unfortunately, buyers and sellers oftenAs an alternative or supplement to the seller’s operations. Accordingly, expected to result either before or fail to pay sufficient attention to thea holdback, buyers and sellers also most M&A purchase agreements state after Closing in a material adverse ramifications of a failure to close when • Specific performance if the financing equity/financial buyers require somemay wish to consider representation that one of the conditions to the buyer’s impact on the seller’s business, negotiating M&A transactions. Perhaps is available; reverse break-up fee if debt financing to pay the purchaseand warranty insurance. In general, obligation to close the transaction is that operations, assets, or prospects”); this is because neither party wishes to the financing fails (the seller has the price, and, as a result, demand financingrepresentation and warranty insurance the seller “shall not have undergone and think about the possibility that the deal right to force the buyer to close if closing conditions and opt for someprovides buyers with additional a Material Adverse Event” prior to • Setting the measurement period may collapse, or perhaps it is because financing is available, but if financing form of reverse break-up fee for failurerisk mitigation, particularly in closing. Because the occurrence of an (so that the determination of they are focused on what they believe is unavailable, the seller’s only to close, instead of specific performance.situations where the holdback is non- MAE would allow the buyer to walk whether an MAE has occurred are the bigger issues (like earnouts remedy is a reverse break-up fee); In either event, with both financial andexistent or relatively small, or where from the deal without being in breach of is not judged solely on the long- and holdbacks). Nevertheless, in this and strategic buyers, of the forgoing foursellers have imposed caps or other the agreement, MAE clauses are heavily term prospects of the seller (as the volatile market, both buyers and sellers • Pure damages (no specific categories of damages, the lastlimitations on their indemnification negotiated between the parties to M&A Delaware courts tend to do), but should carefully consider their remedies performance and no break-up fee, (pure damages) is the least common.obligations. Conversely, sellers may transactions. also on the short-term). prior to signing a definitive purchase but instead, if the buyer fails to close,wish to purchase representation and and sale agreement. the seller can sue the buyer to recover conclUsionwarranty insurance to mitigate their Following the 2007/2008 financial its expenses and damages, which it In an uncertain economic environment,indemnification exposure and as a meltdown, MAE clauses have Generally, the remedies available to must prove). even the plain vanilla provisionsmeans to exit their investment cleanly received additional attention in M&A a seller can be categorized into the in an M&A transaction are subjectand quickly. For example, a seller may negotiations. Obviously, sellers want to following four categories, but these While there is no absolute rule, the to greater scrutiny. The five areaswish to buy insurance so that it knows limit the applicability and breadth of the remedies may be combined and remedies reflected in negotiated M&A highlighted in this article are amongexactly how much of the purchase price clause, while buyers want to strengthen modified in several fashions: purchase agreements tend to vary those that require closer attention andit has available to pay off creditors, and clarify their ability to walk away • Specific performance (if the buyer depending on whether the buyer is a provide a means for counsel to uselimited partners, and other investors, or from the deal. Furthermore, during refuses to close, the seller can request a financial or strategic buyer and whether their creativity to help their clientsto enter into another venture, instead of the last few years, these negotiations court to force the buyer to do so); it needs debt financing to fund the negotiate and, more importantly, closehaving to reserve a part of the purchase have been impacted by a series of recent • Reverse break-up fee and no specific transaction. Generally, because most deals in troubled times. While theprice for indemnification contingencies. Delaware cases in which the courts performance (if the buyer fails to close, strategic buyers do not require financing possibility of unfavorable outcomesWhile representation and warranty consistently have ruled in favor of the the seller is only entitled to payment of to complete a deal (many are sitting on cannot be eliminated, by identifyinginsurance has been around for several sellers and concluded that no event a negotiated fee as an exclusive remedy large cash stockpiles), most are willing and addressing the risks that are mostyears, in the U.S. this insurance product had occurred that qualified as an MAE, and cannot force the buyer to close or to sign agreements without a financing critical, the parties can reduce theis still rarely used. Still, both buyers and as defined in the various purchase seek any damages; this can be a single condition and to agree to specific impact of unforeseen circumstancessellers may wish to explore its benefits agreements at issue. As a result, we fee or a two-tiered fee, with a higher performance should they fail and protect themselves through skillfuland costs, particularly in this economic expect that buyers will become even fee payable for a willful breach and to close. Conversely, most private negotiation of the M&A deal provisionsenvironment. more aggressive in negotiating MAE a lower fee payable for a non-willful discussed in this article. clauses. breach); 5
  4. 4. alternatiVe methodsAlternative M&A Methods in Distressed Settings METHOD DESCRIPTION KEY CHARACTERISTICS Section 363 Sale Bankruptcy Code Section 363 provides a framework for asset sales (outside • Judicial proceeding under Chapter 11 of the Bankruptcy Code the ordinary course) and an opportunity for interested parties to be heard. • Typically an abbreviated stay in bankruptcy Structurally, a Section 363 Sale is similar to a traditional auction process. • Assets are transferred free and clear of liens and encumbrances pursuant A basic Section 363 Sale includes an initial “stalking horse” bidder who to section 363(f) negotiates and enters into a “stalking horse agreement” to purchase all, or • Purchaser is given clean title to assets and protection from successor substantially all, assets from a Chapter 11 debtor. Through a formal and liability by federal court order well-publicized bidding and auction process, the stalking horse agreement hile lingering classes of creditor constituents and situation. Consequently, it is incumbent is subjected to higher and otherwise better bids by other qualified bidders • Allows for the ability to bind non-consenting constituencies tightness in their willingness to engage in a sale on the purchaser to strike a balance using the stalking horse agreement as a baseline. Certain protections • Process can be expensive (debtor-in-possession financing, judicial oversight, professional fees) the capital process, the priority and extent of between the available opportunities are also afforded to a stalking horse bidder, including strict qualification • Provides for the ability to “cherry pick” favorable contracts and leases markets existing liens of secured creditors, and the attendant risks. Selecting the requirements for other qualified bidders, a break-up fee (generally between 1% and 5% of the sale price), expense reimbursement (up to a defined and volatile expedited due diligence, and limited appropriate process is just the first step cap), and minimum overbid increments. The final purchase agreement economic contractual protections afforded to in the journey, but it can often set the between the prevailing bidder and the debtor is subject to bankruptcy court conditions distressed purchasers. One of the tone for the overall transaction and approval. continue fundamental questions for potential should not be taken lightly. to hinder purchasers in a distressed M&A Article 9 Sale An Article 9 Sale enables a secured creditor, following a default by the debtor • Non-judicial foreclosure proceeding under applicable state law the ability transaction is how to structure and The main procedural methods on such secured obligations, to sell all of its collateral in a “commercially • Sale must be “commercially reasonable” (process, time, place, of many companies to refinance their implement the sale process. Most for implementing distressed asset reasonable” manner. Generally, a disposition of collateral is “commercially and other terms)debt or recapitalize their balance sheets, distressed M&A transactions are sales include the following: (i) a reasonable” if the disposition is made: (i) in the usual manner on any rec- • Can be public or private sale processa significant number of otherwise structured as asset deals, frequently sale pursuant to Section 363 of the ognized market; (ii) at the price current in any recognized market at the time • Typically discharges junior liens, but does not afford the “free and clear” of the disposition; (iii) in conformity with reasonable commercial practices protections of a Section 363 Salefundamentally sound companies are enabling a purchaser to “cherry pick” Bankruptcy Code (a “363 Sale”); among dealers in the type of property that was the subject of the disposition; • Executed quickly and inexpensively as compared to Section 363 Salefinancially distressed to the extent that select assets and leave behind certain (ii) a sale pursuant to Article 9 of the or (iv) after approval in a judicial proceeding, by a creditors’ committee, • More likely to result in diminished going concern valuea sale of the company, or substantially liabilities of the existing business. Uniform Commercial Code (an “ Article or representative of creditors. • More limited notice requirements as compared to Section 363 Saleall of its assets, is the only viable 9 Sale”); (iii) a sale in connection with a alternative. As a While the sale of distressed assets receivership; and (iv) an result of ongoing under a conventional bankruptcy assignment for the benefit of creditors A receivership is a type of judicial insolvency proceeding involving the appoint- • Judicial proceeding outside Chapter 11 economic woes, proceeding pursuant to Chapter 11 (an “ABC”). The following table Receivership ment of a “receiver” to administer the assets of a company. A receiver may • Expedited time frame for sale significant M&A of the Bankruptcy Code is largely a contains a brief summary of each of the run the company in order to maximize the value of the company’s assets, sell • Provides protection from waste or deterioration of underlying collateral opportunities relic of the past due to the high costs aforementioned methods and certain the company as a whole, or sell part of the company and close unprofitable • More costly option because of judicial oversight continue to abound and the protracted nature of such key characteristics of each method. divisions. • Assets not transferred free and clear of all liens for strategic and proceedings, the methods described • Like a bankruptcy proceeding, a receivership forces creditors into a single forum financial buyers below offer potential purchasers alike in the significant opportunities, albeit distressed M&A with a somewhat heightened level Assignment for An ABC is a type of non-judicial insolvency proceeding governed by state • Non-judicial proceeding governed by state law rather than federal market to fuel of risk. However, determining the law rather than federal bankruptcy law. An ABC typically involves a contract bankruptcy law the Benefit ofbusiness growth – especially where such appropriate structure and process for where a troubled entity transfers legal and equitable title to a third party • Generally less expensive than a Section 363 Sale Creditorsassets can frequently be purchased for distressed M&A transactions is not a assignee in trust. The assignee then conducts an orderly liquidation of the • Typically requires shareholder approval assets (either piecemeal or in bulk) and distributes proceeds to the assignor’s • Unlike a Chapter 7 trustee, who is randomly appointed from an approved pennies on the dollar. “one size fits all” endeavor. Rather, creditors based on the priorities established under applicable law. panel, assignee is appointed by the company each transaction is unique and must be • Contracts and leases cannot be assigned without required consentsHowever, the distressed M&A landscape assessed based upon the specific facts • Assets not transferred free and clear of all liens (only known liens) is vastly different from that found and circumstances of the particular • Risk of subsequent involuntary bankruptcy filing by unhappy creditors in a conventional M&A transaction. (requires 3 or more unsecured creditors) • Generally an event of default under most contractsPotential purchasers in distressed M&Atransactions must consider a variety ofdistinct issues, including the need andamount of bridge financing to completea sale process, the relationship 7
  5. 5. dUe diliGenceIT in the Current M&A Market &A activity appears In early stage planning, the Acquirer In conducting intellectual property An Acquirer should also keep in law may not be facially evident. Share Moreover, rights under an exclusive to be returning should identify its immediate business due diligence, a lawyer will focus on mind that express or implied licenses purchases generally do not trigger license may be viewed differently to, and may even objectives (i.e., to acquire new the intellectual property rights, rather might be granted in agreements that non-assignment clauses , but may be than non-exclusive rights. Other exceed, levels seen technology, new or complementary than the subject matter of those rights. are not titled as license agreements, blocked by an express change of control issues to consider are the existence of in the middle of the products, employees, technical Intellectual property rights are patents, such as distribution, manufacturing, provision or in a “sham” transaction noncompetition commitments, most last decade, if the knowledge, trademarks, channels, copyrights, trademarks, and trade development, joint venture, consulting, specifically intended to assign a favored nations obligations, and open effects of the financial sources, or other intellectual property secret rights. The subject matter of such and settlement agreements. license. Similarly, a reverse merger source software complications. meltdown do not rights), as well as its long-term strategic rights includes, but is not limited to, (including a reverse triangular merger) continue to haunt us. goals. To accommodate a short-term software, semiconductor designs, Critical items to be examined are in which the licensee survives does A consulting firm found that, while As one commentator exit strategy, for example, the acquired product specifications, methods, the chain of title of owned assets and not usually trigger a non-assignment 50 to 60 percent of its clients’ M&A has noted: intellectual property assets might be processes, documentation, etc. In short, the assignability clauses of licensed clause. However, a merger in which activity was intended to capture “If 2010 was the year in which assigned to the same subsidiary that any product, invention, idea, material, assets. Common examples of chain of the licensee does not survive does synergies related to technology, mergers and acquisitions got back acquires title to the tangible assets, in or information may be protectable title problems include (a) ineffective trigger a non-assignment clause. As most technology issues were not off the mat, 2011 could be the year in order to simplify a future divestiture, under intellectual property laws. A assignments of rights under “work one court has explained, “[a] transfer fully addressed during the diligence which it starts throwing haymakers. rather than assign the intellectual single asset might include multiple made for hire,” because legal tests is no less a transfer because it takes process or post-deal planning. An Global M&A has totaled $309 billion property to a subsidiary whose sole intellectual property assets or subject were not met, (b) lack of consideration place by operation of law rather than Acquirer that prioritizes and focuses since January 1, according to data purpose is to own all the affiliated matter from a legal perspective. For in invention assignments, (c) lack of by a particular act of the parties. The its technology and intellectual from Thomson Reuters. That’s a 69% entities’ intellectual property rights. example, proprietary software (a) may specificity with respect to assignment merger was effected by the parties and property due diligence from the jump over the same period in 2009, Additionally, the scope, and thus the be copyrightable as a whole, (b) may documents (particularly with catch all the transfer was a result of their act planning stages of a deal will no and represents the busiest start since expense, of due diligence should be include algorithms, code, methods or phrases such as “all rights necessary” for of merging.” Since judicial decisions doubt recover more value, mitigate 2000.” weighed against the transaction’s processes that might be independently a particular purpose or license), and (d) turn on a transaction’s facts, there are risks, and achieve greater goals. This strategic importance. Although patentable, (c) may include internal failure to grant the licensee a right to decisions contrary in result, pointing to is particularly true if the Acquirer’sIn the new era, key characteristics of M&A expensive, due diligence is crucial to designs and internal documentation sue third parties for infringement. the intellectual property subject matter, key information technologyactivity have changed. At an ever-increasing the discovery of “landmines.” that constitute trade secrets, even For each significant license, the the fine points of the applicable state personnel are involved in the early pace, transaction if not patentable, and (d) may well Acquirer should consider: (1) Does merger statute, the federal preemption planning stage, in coordination value will derive If a transaction fails to close, the be associated with brand names or the license agreement contain any deference, specific licensure provisions, with the Target’s counterparts, since from information Acquirer’s employees might retain their logos that constitute trademarks. The provisions regarding assignment, and equitable considerations, such discovered information might be too technology. Yet, knowledge, gleaned during diligence, distinction between rights and subject change of control, and similar issues? as whether the subject matter will be technical to be properly interpreted with tighter access of the Target’s valuable proprietary matter is also important to help the (2) Do such restrictions apply, given owned by a competitor. in a legal review. Thus, the Acquirer to financial markets, information. The Acquirer could be left Acquirer remain focused on the positive the contemplated structure of the may gain a superior bargaining Acquirers face little at risk for misuse of such information, or value and the negative or limitations of deal? (3) Outside of the transaction Governing law might contradict the position in negotiating meaningful room for error. Since such as claims for misappropriation intellectual property. Acquirers should agreement, what rules govern the license agreement or itself be unclear. representations, warranties, and studies have shown of the trade secrets of the Target or its avoid focusing only on the positive or transfer of this licensed asset? Whether For example, some rights are governed indemnifications that address that many M&A competitors, as well as an increased value of intellectual property, while a license contains restrictions is, of by federal common law (e.g., patent identified intellectual property risks. deals fail to achieve risk of treble damages for patent ignoring the negative or limitations, such course, evident from examining the licenses and copyrightable subject their primary goals, infringement, if knowledge obtained as infringement or misappropriation of text, although provisions that indirectly matter), while other rights are governedparties now pay more attention to diligence, during diligence serves as the basis for third-party intellectual property rights, affect assignment should be considered. by state law (e.g., trade secrets), andwhich, during times of intensive dealflow, a “willfullness” finding. Therefore, which may be derived, for example, Whether the transaction structure some rights involve both federal andwas often relegated to junior associates as a the Acquirer should enter into a from title defects at any point in the constitutes an assignment or change state law (e.g., trademark licenses).mere checklist item. Thus, with technology nondisclosure or standstill agreement chain of ownership or from prohibitions in control under the agreement’sbecoming increasingly important, with the Target that addresses on assignment in present or prior definitions (or lack thereof) or governingtechnology due diligence is a top priority. permitted use of disclosed information, transactions. as well as permitted 9
  6. 6. dUe diliGence would be harmed if a transaction were consummated. A CFIUS review for aSelected Regulatory transaction that could result in foreign control of a U.S. entity or assets may be voluntarily initiated by any transactionApprovals party. However, CFIUS has the power to unilaterally initiate a transaction review. 31 C.F.R. § 800.401. A CFIUS review can last up to 30 days (31 C.F.R. § 800.404), but may be extended for another 45 days ergers, sales of make a second request for information the potential for expansion into new if CFIUS determines further investigation substantially all or initiate other investigation, products or geographic markets. Item is required (31 C.F.R. 504). If CFIUS assets, and similar which could significantly delay the 4(d) now requires three additional types concludes that national security is transactions in transaction or require its restructuring. of documents that might not have been threatened, it makes a recommendation highly regulated Thus, compliance with HSR adds captured by Item 4(c): for enforcement to the President, who has industries, such considerable expense to a transaction. 15 days to act on the recommendation. as financial Generally speaking, transactions that • “Confidential Information Since national security is not defined, the institutions, are subject to HSR compliance are Memoranda” (or any equivalent Federal regulators have had the power question of whether CFIUS is applicable frequently large transactions (e.g., if the acquiring document, not including ordinary under “Exon-Florio” for decades to derail rests largely on the question whether require specific person will acquire aggregate total course documents and/or financial a foreign party will obtain “control” regulatory amount of voting securities or assets a transaction in the interests of national over the U.S. entity or assets. Here too, data) that specifically relate to the saleapprovals. Significant transactions in in excess of a threshold, which at the of the acquired entity or assets and security. however, the CFIUS requirements arenon-regulated industries must also present date is $66 million), although produced up to one year before the unclear, because regulations adoptedconsider the possibility of regulatory there are alternate thresholds that could date the notice is filed. by the Treasury Department includeapprovals under certain circumstances. ensnare large entities. On August 18, an open-ended definition of “control,” Antitrust Update: For many decades, remedies are valuable for enablingThis article will highlight a few 2011, new HSR Rules became effective • Studies, surveys, analyses, and which can encompass different types monopolistic and anticompetitive it to preserve a merger’s potentialinstances. that made significant changes to the reports prepared by investment of influence by the foreign party. For transactional behavior has been subject efficiencies, while remedying the HSR Premerger Notification Rules and bankers, consultants, or other third example, in 2008, CFIUS raised concerns to the scrutiny of regulators under perceived competitive harm. CommonHSR: Transactions meeting certain the Premerger Notification and Report party advisors for the purpose of about an acquisition proposed by federal and state laws. On June 17, 2011, forms of conduct relief are firewall, non-thresholds will be subject to the Hart- Form (the “HSR Form”), that may evaluating or analyzing market Bain Capital Partners and Huawei the DOJ updated its Policy Guide to discrimination, mandatory licensing,Scott Rodino Antitrust Improvements substantially increase the burden placed shares, competition, competitors, Technologies of 3Com Corp. Based on Merger Remedies, which is located at transparency, and anti-retaliation Act of 1976, on filing parties, particularly private markets, potential for sales growth, or press reports, it appears that CFIUS’s provisions, as well as prohibitions on as amended equity and hedge funds having diverse expansion into product or geographic concerns focused upon a 3Com guidelines/272350.pdf. In the Guide, certain contracting practices. The Guide (“HSR”), which is portfolio investments. Additionally, markets that specifically related to the business unit that supplied certain the DOJ stresses that its review is fact shows a new propensity on DOJ’s part administered by manufacturers must now provide sale of the acquired entities or assets, security technology to U.S. Government specific and that, through a careful to create innovative remedies, as well as the Federal Trade revenues and NAICS codes for each which were produced up to one year agencies. Being unable to restructure application of legal and economic to develop a post-transaction monitoring Commission product manufactured outside the U.S. before the date the notice is filed. the transaction to CFIUS’s satisfaction, principles, its remedies are designed process to ensure that the remedies are (“FTC”) and but sold in or into the U.S. the parties announced the termination to preserve competition, not to protect enforced. the Antitrust • Studies, surveys, analyses, and of the transaction in March 2008. To individual competitors. Typically, Division of the The HSR Form, in Item 4(c), previously reports evaluating or analyzing commentators, a surprising aspect of this remedies are viewed as having either National Security: Federal regulators U.S. Department required the reporting person to synergies and/or efficiencies matter was that Huawei would only have structural or conduct provisions. A have had the power under “Exon-Florio” of Justice submit a number of attachments, prepared for the purpose of obtained a 16.5% stake in the transaction, structural remedy generally involves for decades to derail a transaction in the (“DOJ”). If HSR including documents created by or for evaluating or analyzing the with an option of purchasing another the sale of physical assets or requiring interests of national security. In recentapplies, the parties must submit notices officers or directors of the reporting acquisition. 5% stake, and receiving 3 of 11 board that the merged firm create new years, that power has been enhancedon HSR forms to both the FTC and person that were prepared for the members. (Reported in 11 Mergers & competitors through the sale or licensing through a review process under theDOJ, triggering a waiting period that purpose of evaluating or analyzing Acquisitions Law Report No. 14, p. 267). of intellectual property rights. A conduct Committee on Foreign Investment inmust expire or be terminated before the transaction with respect to market remedy usually entails provisions that the United States (“CFIUS”). CFIUSthe parties may consummate the shares, competition, competitors, prescribe certain aspects of the merged is an interagency committee, chairedtransaction. The reviewing agency may markets, potential for sales growth, and firm’s post-consummation business by the Secretary of the Treasury, that conduct. The DOJ believes that conduct evaluates whether national 11
  7. 7. dUe diliGence dUe diliGenceForeign Corrupt Practices Act Withdrawal Liability from the n 1977, as a response to Employer’s Perspective reports of bribery of foreign government officials by U.S. companies, Congress adopted the Foreign Corrupt Practices liability that may a collective bargaining agreement. In employer’s ability to preserve its right Act (the “FCPA”). The FCPA easily exceed the event that the employer ceases to to dispute any aspect of the demand contains two primary parts: hundreds of thousands have an obligation to contribute to a begins to expire. (1) an anti-bribery provision of dollars, extends multiemployer defined benefit pension that prohibits corrupt beyond normal plan (for example, a termination of the An employer has the right to “request payments to foreign officials to corporate entity collective bargaining agreement), the a review” within 90 days of the date of obtain or retain business, and protections, bears no employer must pay its proportionate its receipt of a demand for payment of (2) accounting and internal intuitive relation to share of unfunded vested benefits (the withdrawal liability. The employer may: control requirements. historical monthly difference between the plan’s assets 1. Ask the plan to review any specific obligations toward and the present value of accrued vested matter relating to the determinationIn recent years, FCPA investigations and the liability, and has benefits) to the plan as “employer of the employer’s liability and theenforcement actions by the Department only a 90 day period to challenge any withdrawal liability.” In addition, in schedule of payment;of Justice and the Securities and An understanding of the FCPA will help aspect of the liability before all rights some circumstances, a reduction inExchange Commission have increased companies to implement certain and ability to dispute the liability are an employer’s contributions over a 2. Identify any inaccuracy in thedramatically. The penalties for FCPA lost. This is an period of years can cause a “partial determination of the amount of theviolations are stiff, including fines of up procedures and processes... accurate, though withdrawal” with a proportionate unfunded vested benefits allocable toto $2 million for violations of the anti- starkly worded, assessment of liability. With the the employer; andbribery provision and up to $25 million description of substantial decline in the value of withdrawal 3. Furnish any additional relevantfor violations of the accounting and investments over the past several years liability for information to the plan.internal control requirements. To detect any potential FCPA violations by the target company regarding combined with reduced contributions, of a target company, a company should FCPA compliance, a termination employers many multiemployer defined benefit who cease a An employer’s request for information The FCPA may conduct a thorough due diligence right under certain circumstances pension plans now have, and must contribution about the assessment, or merely stating be applicable process, including assessing the and indemnification of any damages collect, withdrawal liability from obligation to a that it disagrees with the liability to companies corruption level of the countries where resulting from a breach of the withdrawing employers for the multiemployer assessment, is not a request for who merge the target company does business, agreement. first time. The assessed amounts of defined benefit review. If the employer fails to “request with or acquire reviewing the target company’s withdrawal liability are often a pension a review” within the 90 day period, the another company. FCPA compliance program, if any, An understanding of the FCPA as it surprising and shocking discovery for plan. Failure to understand and act employer is precluded from challenging Generally, when a and inspecting the target company’s relates to mergers and acquisitions will the employer. on significant developments and the assessment, amount, or any aspect company merges accounting and internal controls. help companies to implement certain hard statutory deadlines can lead to of the demanded withdrawal liability in with or acquires procedures and processes to protect A plan has the obligation to notify an irreversible consequences for employers. any venue, including any defense to a another company, Even if such due diligence review them from unwillingly assuming employer “as soon as practicable” after subsequent collection suit. Employers it assumes the does not uncover any FCPA violations, FCPA-related liabilities. a withdrawal of the amount of the “Employer withdrawal liability” is can make the mistake of issuing a liabilities of that a company should incorporate into employer’s withdrawal liability, provide a statutory obligation imposed on response in the form of a denial ofcompany, including the liability for a merger or purchase agreement a schedule of monthly or quarterly an employer that contributes to a liability or simple refusal to pay withoutFCPA violations. language to protect itself against installment payments amortized over a multiemployer defined benefit pension invoking their statutory right to a the possibility of assuming a FCPA set period of time with interest, and to plan, generally as a negotiated benefit review of an assessment of withdrawal violation. Such language may include demand payment in accordance with the for unionized employees pursuant to liability, often mistakenly believing certain representations and warranties schedule. Immediately upon receipt, the that they may advance a defense in an anticipated suit by the plan. continued on next page > 13