Negotiating and Documenting the Transaction

Question 1

What is a Letter of Intent?

Answer 1

• It memorializes current discussions (clarifies essential deal terms), identifies open issues, supports/justifies potential disclosure to the public, and allows the securing of a tentative commitment
• NOTE: Letters of Intent generally announce that they are not binding on either party, but some terms may be binding!

Question 2

Typical non-binding provisions of Letters of Intent

Answer 2

• Price, consideration, structure
• Matters central to the deal (e.g., intellectual property)
• Outline of expectations

Question 3

Typically binding provisions of a Letter of Intent

Answer 3

• Confidentiality
• Access for buyer’s due diligence
• Non-use of information
• Standstill/No Shop
• Terms concerning public announcements

Question 4

Acquisition Consideration - Business and Legal Issues - Key Issues:

Answer 4

1. Form of consideration (cash/stock/notes)
2. Amount of Consideration
3. Timing of Consideration

Question 5

Key Issues - Form of Consideration

Answer 5

• Everybody likes cash, except those who may face large capital gains on disposition of assets
  
  • So some may prefer non-cash consideration if the tax result will be favorable
    
    • Use of stock consideration may require registration of the distribution per order of the 1933 Act
• Business goals may also influence consideration form

Question 6

Key Issues - Timing of Consideration + What is an Earnout?

Answer 6

• Payment at closing
• Handshake or partial payment at closing with payment(s) to follow
  
  • Earn-outs = when post-closing financial performance dictates ultimate purchase price paid
    
    • For Target, the key is to keep hackles up in negotiating particulars so that you have a realistic chance at succeeding; otherwise, the earn-out is a means of cramming down the Bidder’s purchase price
    • For Bidder, earn-out may result in wrecking the company’s future for the sake of a short-term financial goal, so caution is warranted
  • Escrows
    
    • Ensures payment of promised consideration
    • Allows prompt recovery on indemnification claims
  • Post-Closing Purchase Price Adjustments
    
    • May not know the value of something until another event happens after closing so the company will need to adjust the price after the event happens

Question 7

What applies if you are attempting to attack the decision of a diinterested board?

Answer 7

Business Judgment Rule

Question 8

Basic Anatomy of an Agreement

Answer 8

1. Introductory provisions
   
   • Parties, whereas clauses, definitions
2. Structure
3. Terms governing purchase price and payment
4. Representations and warranties
5. Covenants
6. Closing particulars and conditions
7. Termination
8. Indemnification

Question 9

Negotiating and Drafting the Acquisition Agreement - Representaitons and Warranties

Answer 9

• Target’s confirmation of its business and affairs as of a time certain
• Bidder’s confirmation of its business and affairs as of a time certain
  
  • May incorporate other items by reference to appendices, schedules, disclosure schedules, etc.
• Reps and Warranties are tested as of the date of the signing of the agreement and as of the closing date (i.e., via a “bring-down” provision) –> speak of a certain time
• Reps and Warranties may serve as the basis for a given party walking away from the transaction
  
  • “Material adverse change” (MAC clause)
  • “Material adverse effect” (MAE clause)
• Reps and Warranties may serve as the basis for a given party securing indemnification or some form of performance
• Reps and warranties that survive closing
  
  • Breach
  • Indemnification

Question 10

Negotiating and Drafting the Acquisition Agreement - Covenants

Answer 10

• Convey a promise with respect to the future:
  
  • To do something (i.e. to register a stock distribution)
  • To refrain from doing something (i.e. not to compete)
    
    • They do not speak as of a given date
• Time to which covenant relates
  
  • From signing to closing
  • Post-Closing (Covenant “survives closing”)
• Tone of covenant
  
  • Affirmative
  • Negative
    
    • Mitigators
      
      • Refrain or get “consent”
      • Refrain or get “consent, such consent not to be unreasonably withheld”

Question 11

Negotiating and Drafting the Acquisition Agreement - Conditions Precedent to Closing

Answer 11

• Failure to satisfy a condition may excuse Bidder or Target
• It is common to see a bring-down condition with respect to reps and warranties
• Other common conditions include:
  
  • Receipt of legal opinion concerning various aspects of the transaction
  • Receipt of favorable reports from agencies

Question 12

Negotiating and Drafting the Acquisition Agreement - Closing

Answer 12

• Sets forth closing particulars, what is going to occur at closing
  
  • Parties will execute various documents
  • X will deliver cash by wire transfer
  • Y will hand over a, b, and c
  • Etc.
• Checklist is helpful
• Closing may be lively or sedate; there may be deal toys and post-closing festivities

Question 13

Negotiating and Drafting the Acquisition Agreement - Things to Keep in Mind

Answer 13

1. There is a natural tension between Bidder and Target
2. Bidder wants to be able to walk away or secure indemnification without any real difficulty
3. Target wants Bidder to accept the risks inherent in operating a going concern
4. Counsel must balance zealous advocacy with good/fair business sense
5. Negotiation is where real IQ comes into play

Question 14

Negotiating and Drafting the Acquisition Agreement - Indemnification Provisions

Answer 14

• Provisions allow some form of recovery from Target’s sellers on the occurrence (or non-occurrence) of some event
  
  • The Bidder is seeking some form of insurance on getting the essential benefit of the bargain is sought
• Heavily negotiated
  
  • Seller: “We’ve disclosed everything. No insurance.”
  • Buyer: “We need to make sure and need some remedy, just in case something was inadvertently overlooked. We are not self-insurers here.”
• “Baskets” will often help
  
  • Basket = a certain dollar amount of claims must accumulate “in the basket” before Bidder triggers rights to be indemnified by the target
    
    • Materiality qualifier and baskets work against each other –> materiality qualifiers in reps and warranties will make it harder for the rep or warranty to be considered untrue so in order to trigger indemnification, the materiality qualifier and the basket have to be cleared
      
      • So two hurdles that have to be cleared
        
        • If you’re going to use materiality qualifiers, you should make sure that the basket will overflow a little easier

Question 15

Negotiating and Drafting the Acquisition Agreement - Due Diligence

Answer 15

• Bidder’s lawyer takes the lead in conducting the investigation and is charged with ensuring a thorough and accurate review
• Results of the due diligence investigation will have an impact on the exact terms of the merger agreement
• So, develop a personal due diligence methodology and refine it (and update it!) as you gain experience