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Best Practices in Drafting and Negotiating Contracts and Agreements
11th Annual Mergers and Acquisitions Insight Conference
December 5-6, 2013 Calgary, Alberta
John F. Clifford
Overview
Avoiding uncertainty in deal terms Trends in M&A deal terms
2
Avoiding Uncertainty
Six sources of uncertainty in deal terms (K. Adams) Ambiguity Undue generality Inconsistency Redundancy Conflict Vagueness
3
Avoiding Uncertainty – cont’d.
“Gaps” also are a common source of ambiguity Missing details Change in circumstances Agreements to agree
It’s all about the words Important to review carefully More eyes are better
4
Trends in M&A Deal Terms
ABA 2012 Canadian Private Target M&A Deal Points Study Sourced agreements from SEDAR
Deals closed in 2010 and 2011
350+ deals identified Removed agreements for deals involving public
targets, deals with purchase price <$5 million and “non-traditional” deals Bankruptcy, non-arm's length, governing law not Canadian
Resulting pool: 64 deals having value ranging from $5 million to $2.25
billion
5
Trends in M&A Deal Terms – cont’d.
Study Methodology Agreements reviewed in detail
9 principal areas of review Divided amongst six working groups Completed worksheet for each issue, each agreement
o modeled on US forms
QC check of worksheets “Issue group leaders”
Collated data Further QC
Checked data used to complete study
6
Trends in M&A Deal Terms – cont’d.
Study Results 100+ substantive slides Study reports on
Statistic (frequency of use of certain terms) Comparisons to ABA model agreement provisions Comparisons to 2008 and 2010 Canadian Studies Comparisons to US Private Target Studies
Available at: https://apps.americanbar.org/dch/committee.cfm?com=CL560003
7
Select Study Slides
8
Contents I. Financial Provisions ………………………………………………………………………………………………… Slide 11
A. Post-Closing Purchase Price Adjustments…………………………………………………………………………………… Slide 12 B. Earnouts………………………………………………………………………………………………………………………….. Slide 19 C. North American Comparisons…………………………………………………………………………………………………. Slide 22
II. Pervasive Qualifiers………………………………………………………………………………………………….. Slide 23
A. Definition of “Material Adverse Effect” ……………………………………………………………………………………….. Slide 24 B. Knowledge……………………………………………………………………………………………………………………….. Slide 38 C. North American Comparisons………………………………………………………………………………………………….. Slide 41
III. Target’s Representations, Warranties and Covenants…………………………………………………………Slide 42
A. Financial Statements…………………………………………………………………………………………………………… Slide 43 B. “No Undisclosed Liabilities” ……………………………………………………………………………………………………. Slide 45 C. Compliance with Law…………………………………………………………………………………………………………… Slide 47 D. Full Disclosure …………………………………………………………………………………………………………………. Slide 50 E. North American Comparisons…………………………………………………………………………………………………. Slide 52 F. Covenants……………………………………………………………………………………………………………………….. Slide 53 G. North American Comparisons…………………………………………………………………………………………………. Slide 57
IV. Conditions to Closing………………………………………………………………………………………………… Slide 58
A. Accuracy of Target’s Representations……………………………………………………………………………………….. Slide 59 B. Buyer’s MAC Condition………………………………………………………………………………………………………… Slide 65 C. No Legal Proceedings Challenging the Transaction ……………………………………………………………………….. Slide 67 D. Legal Opinions (Non-Tax) of Target’s Counsel……………………………………………………………………………… Slide 70 E. North American Comparisons………………………………………………………………………………………………… Slide 71
V. Indemnification………………………………………………………………………………………………………… Slide 72
A. Sandbagging…………………………………………………………………………………………………………………….. Slide 73 B. “No Other Representations and Warranties”/Non-Reliance………………………………………………………………… Slide 77 C. Non-Reliance and “Sandbagging” – Correlation……………………………………………………………………………… Slide 80 D. Non-Reliance and Full Disclosure Representation – Correlation…………………………………………………………..Slide 81 E. “Sandbagging” and Full Disclosure Representation – Correlation…………………………………………………………Slide 82 F. North American Comparisons…………………………………………………………………………………………………. Slide 83 G. Survival/Time to Assert Claims………………………………………………………………………………………………… Slide 84 H. Types of Damages/Losses Covered………………………………………………………………………………………….. Slide 87 I. Baskets…………………………………………………………………………………………………………………………… Slide 89 J. Eligible Claim Threshold……………………………………………………………………………………………………….. Slide 95 K. “Double Materiality” Scrape……………………………………………………………………………………………………. Slide 97 L. Caps……………………………………………………………………………………………………………………………… Slide 99 M. Indemnification as Exclusive Remedy………………………………………………………………………………………. Slide 103 N. Escrow/Holdback………………………………………………………………………………………………………………. Slide 105 O. Reductions Against Buyer’s Indemnification Claims………………………………………………………………………. Slide 108 P. North American Comparisons………………………………………………………………………………………………... Slide 109
VI. Dispute Resolution…………………………………………………………………………………………………. Slide 116
A. Governing Law…………………………………………………………………………………………………………………. Slide 117 B. Alternative Dispute Resolution……………………………………………………………………………………………….. Slide 118 C. North American Comparisons………………………………………………………………………………………………... Slide 120
Canadian 2012 Private Target Study, slide 10 Release Date: 12/28/12
Post-Closing Purchase Price Adjustments* Includes
Adjustment70%
(63% in 2008 study)(50% in 2010 study)
No Adjustment
30%(37% in 2008 study)(50% in 2010 study)
Financial Provisions
Adjustment Metrics**
(Subset: includes adjustment)
** 22.5% of the post-closing purchase price adjustments were based on more than one metric. Canadian 2012 Private Target Study, slide 13
Release Date: 12/28/12
39%27%
6%11%
3%16%
6%11%
77%70%
3%5%
Other
Cash
Assets
Debt
Working Capital
Earnings
* Excludes one deal where information was redacted.
Deals in 2012
Deals in 2010
US 2011 Deal Points Study Canadian 2012 Deal Points Study
Deals with Post-Closing Adjustments
82% (68% in 2007 US study*) (79% in 2009 US study*)
70% (63% in 2008 study) (50% in 2010 study)
Working Capital as Adjustment Metric
79% (69% in 2007 US study) (77% in 2009 US study)
70% (55% in 2008 study) (77% in 2010 study)
Buyer Prepares First Draft of Closing Balance Sheet
86% (79% in 2007 US study) (83% in 2009 US study)
52% (36% in 2008 study) (29% in 2010 study)
Methodology – GAAP consistent with past practice
42% (72% in 2007 US study) (39% in 2009 US study)
41% (48% in 2008 study) (19% in 2010 study)
Deals with Earnouts 38% (19% in 2007 US study) (29% in 2009 US study)
21% (10% in 2008 study) (3% in 2010 study)
Private Target M&A Deals North American Comparisons
Financial Provisions
* The “2007 US study” refers to the 2007 Private Target Mergers & Acquisitions Deal Points Study released by the ABA Mergers & Acquisitions Committee on October 8, 2008. The “2009 US study” refers to the 2009 Private Target Mergers & Acquisitions Deal Points Study released by the ABA Mergers & Acquisitions Committee on December 13, 2009.
Canadian 2012 Private Target Study, slide 22 Release Date: 12/28/12
Definition of “Material Adverse Effect”
“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.
(ABA Model Stock Purchase Agreement, Second Edition)
Pervasive Qualifiers
Canadian 2012 Private Target Study, slide 24 Release Date: 12/28/12
Pervasive Qualifiers
Definition of “Material Adverse Effect”
Canadian 2012 Private Target Study, slide 25 Release Date: 12/28/12
MAE Defined*83%
(73% in 2010 study)
MAE Not Defined
14%(18% in 2010 study)
MAE Not Included
3%(9% in 2010 study)
"Prospects" Not Included
65%(60% in 2010 study)
"Prospects" Included
35%(40% in 2010 study)
(Subset: MAE defined*)
*Excludes two deals where information was redacted.
Definition of “Material Adverse Effect” – Carve Outs
(Subset: deals with MAE definition)
Pervasive Qualifiers
Canadian 2012 Private Target Study, slide 32 Release Date: 12/28/12
No Carve Outs Included
30%(40% in 2010 study)
Definition Includes Carve
Outs70%
(60% in 2010 study)
Definition of “Material Adverse Effect” – Carve Outs*
Pervasive Qualifiers
Canadian 2012 Private Target Study, slide 33 Release Date: 12/28/12
33%48%
30%
57%33%
50%44%
67%
48%76%
70%60%
93%71%
93%86%
General Economic Conditions
Industry Conditions
Financial Market Downturn
Announcment or Pendency ofDeal
Changes in Law
Actions Required by Agreement
War or Terrorism
Changes in Accounting
(Subset: deals with MAE definition with carve-outs)
*Definitions may include more than one carve out.
Deals in 2012
Deals in 2010
Full Disclosure Representation
Representation Included
52%(56% in 2010 study)
Representation Not Included
48%(44% in 2010 study)
Yes - 39%(37% in 2010 study)
No - 61%(63% in 2010 study)
Qualified by Knowledge
(Subset: deals with rep)
Target’s Representations, Warranties and Covenants
Canadian 2012 Private Target Study, slide 51 Release Date: 12/28/12
Cap Amounts as % of Transaction Value* (Subset: deals with expressly stated cap)
Indemnification
* Excludes 18 deals where cap amount is all or partially redacted or final purchase price is not determinable.
Canadian 2012 Private Target Study, slide 100 Release Date: 12/28/12
52%45%40%
17%17%
14%
7%7%18%
7%14%
18%
3%3%
7%
14%14%
3%
Purchase Price
> 50% to < Purchase Price
> 25% to 50%
> 15% to 25%
> 10% to 15%
< 10%
Deals in 2012
Deals in 2010
Deals in 2008
Reductions Against Buyer’s Indemnification Claims
Silent61%
(66% in 2008 study(66% in 2010 study)
Expressly Included
39%(34% in 2008 study)(34% in 2010 study)
Silent46%
(60% in 2008 study)(50% in 2010 study)
Expressly Included
54%(40% in 2008 study)(50% in 2010 study)
Expressly Included
37%(20% in 2008 study)(22% in 2010 study)
Silent63%
(80% in 2008 study(78% in 2010 study)
(Subset: deals with survival provisions) Reductions for Tax Benefits Reductions for Insurance Benefits
Requirement that Buyer Mitigate Losses
Indemnification
Canadian 2012 Private Target Study, slide 108 Release Date: 12/28/12
Canadian 2012 Deal Points Study
4%
12%
2%
34%
14%
25%
0%
3%
1%
3%Silent/Unspecified
Express No Survival
6 months or less
> 6 to < 12 months
12 months
> 12 to < 18 months
18 months
> 18 to < 24 months
24 months
> 24 months
Private Target M&A Deals North American Comparisons
Survival Periods
Indemnification
US 2011 Deal Points Study
8.5%
47%
1.7%
12%
3.4%
17%
0%
1.7%
1.7%
7%Silent/Unspecified
Express No Survival
6 months or less
> 6 to < 12 months
12 months
> 12 to < 18 months
18 months
> 18 to < 24 months
24 months
> 24 months
Canadian 2012 Private Target Study, slide 109 Release Date: 12/28/12
US 2011 Deal Points Study
Canadian 2012 Deal Points Study
9%
0%
4%
14%
17%
14%
43%
Purchase Price
> 50% to < PurchasePrice
> 25% to 50%
> 15% to 25%
> 10% to 15%
10%
< 10%
40%
14%
18%
18%
7%
3%<10%
10% to 15%
>15% to 25%
>25% to 50%
>50% to <PurchasePrice
Purchase Price
Cap Amounts as % of Transaction Value
Private Target M&A Deals North American Comparisons
Indemnification
Canadian 2012 Private Target Study, slide 114 Release Date: 12/28/12
Questions:
John F. Clifford (416) 865-7134
john.clifford@mcmillan.ca
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