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Claims by Acquirers, Sellers, and
Unsuccessful Bidders
Presented by:
Mary M. Bannister, Matthew S. Knoop
and Robert V. Spake, Jr.
CONTRACT INDEMNITY
Robert V Spake, Jr. is an attorney in Polsinelli’s
Business Litigation department. Bob combines his
strong advocacy skills, business minded practice,
and specialized knowledge of Delaware corporate
law to partner with clients and effectively resolve
business disputes. His practice focuses on complex
business, derivative, securities, and shareholder
class action litigation in both federal and state
courts throughout the country.
Robert V. Spake, Jr.
Associate
Contract Indemnity
� Representations and warranties provide
information to the buyer and create the basic
structure for allocating risk between the buyer and
seller.
� Indemnification provisions provide the extent to
which a party will defend, hold harmless, and
indemnify the other party for breaches of those
representations and warranties.
Contract Indemnity
� Sellers want to limit contractual indemnity.
� Buyers want to expand contractual indemnity.
� Negotiate, among other things, the timing,
process, payment of claims, and limitations on
liability.
Contract Indemnity
� Often exclusive remedy (“EOR” or “exclusivity of
remedies”)
� Handful of common carve-outs
– Fraud
– Intentional misrepresentation
– Equitable remedies
Contract Indemnity
� Frequently negotiated claims
– Survival Period
• Timeframe for bringing indemnification claims
• 1 to 2 years most common
– Cap
• Overall limit on indemnity claims (set dollar
amount or percentage of the deal value)
Contract Indemnity
� Frequently negotiated claims
– Eligible Claim Threshold
• Excludes individual and unrelated claims under a
certain dollar amount
– Baskets and Deductibles
• Excludes immaterial claims
Contract Indemnity
� Frequently negotiated claims
– Sandbagging
• Addresses buyer’s remedies based on knowledge
of inaccuracy or breach before closing
– Escrow / Holdback
• Portion of purchase price to cover future
indemnification claims
BREACHES OF REPRESENTATIONS
AND WARRANTIES
Matt Knoop focuses his practice on preparing and trying civil litigation matters in state and federal courts throughout the country. His experience spans a variety of commercial litigation matters, including those related to mergers and acquisitions, data processing, telecommunications, and manufacturing.
Matthew S. Knoop
Shareholder
What are Reps and Warranties?
� Representations and warranties generally
serve to allocate risk among parties to
merger and acquisition agreements.
� Some are “boilerplate”, others are very
specific and negotiated vigorously.
What are Reps and Warranties?
� A representation within an agreement
induces the contract and historically
functioned as a “condition” of the contract.
� If false, the buyer could repudiate or rescind
the contract.
� Important protection against fraud
What are Reps and Warranties?
� Examples of representations in M&A
agreements:
– All contingent liabilities have been disclosed.
– Historical financial statements have been
prepared in accordance with GAAP.
What are Reps and Warranties?
A warranty is an assurance that a fact is true or
that certain acts have been performed
OR
A promise that something will happen in the
future
What are Reps and Warranties?
A warranty serves as a promise of indemnity if
a statement of fact is false.
Unlike a representation, the beneficiary of
the promise does not have to believe that the
statement is true.
The purpose of a warranty is to relieve the
beneficiary from the obligation of determining
whether the statement is true or not.
What are Reps and Warranties?
� Examples of warranties in M&A agreements:
– Seller is in good standing with all contractual
obligations.
– Seller has informed Buyer of all potentially
material claims that exist.
What are Reps and Warranties?
� Certain covenants also may be found in
M&A agreements (e.g., covenants that
individual sellers will not compete).
– A covenant is a promise that a party has (or has
not) done something or will (or will not) do
something.
What are Reps and Warranties?
� If a party materially breaches a covenant
contained in a merger or acquisition
agreement, it may excuse the performance
of the non-breaching party.
Negotiating Reps and Warranties
� In formulating transaction terms:
– Identify potential future losses
– Consider specific scenarios
– Categorize/prioritize risk
– What are appropriate remedies?
– Are there alternative means to resolve disputes?
� Negotiate appropriate reps and warranties
� Balance between the “ideal” contract and closing timely and in a cost-effective manner
Negotiating Reps and Warranties
� Reps and Warranties Insurance
– Available for both buyers and sellers
– Covers certain risks
– Reliable source of funds to satisfy claims
– Certainty for sellers
– Consider exclusions and coverage limits
– Cost may be prohibitive
Negotiating Reps and Warranties
� Protections for buyers:
– “Strong” representations and warranties
– Escrow released only after survival period(s) for
reps and warranties expire(s)
– Purchase price holdback or offset
– Liquidated damages provision
– Damages limitation provision “carve outs”
Negotiating Reps and Warranties
� Protections for sellers:
– “Weak” representations and warranties
– Damages limitation provisions
• “Basket” (i.e., deductible)
• Caps
• Exclusions
Litigating Reps and Warranties
� Potential claims and remedies may differ depending on whether the buyer/seller breached a representation, warranty or covenant
� Generally have a breach of contract claim
– Damages directly flowing from the breach
– Benefit of the bargain
– Unlikely to recover attorney fees unless explicitly provided for in the agreement
Litigating Representations
� Litigating representations:
– Often require only substantial compliance
– If intentionally false, claims for
• Deceit
• Fraud/fraudulent misrepresentation
– If unintentionally false, buyer/seller still may
have a negligent misrepresentation claim
Litigating Representations
� Proving fraud:
– Materiality
– Scienter (knowledge or conscious ignorance of
the falsity of a representation)
– Intent to induce reliance
– Justifiable reliance
Litigating Representations
� Broader remedies for a breach of a
representation:
– Rescission (return parties to pre-contract status)
• Must be timely
• Must tender all obtained through contract
• Often difficult post-acquisition/merger
(“unscrambling the eggs”)
Litigating Representations
� Remedies for breach of representation (continued)
– Alternatively, affirm the contract and sue for damages
• Compensatory damages
• Sometimes only out-of-pocket damages
– Potential for punitive damages (if permitted under applicable law) where proof of fraud or other intentional misconduct
– Potential to recover attorney fees
Litigating Warranties
� Litigating warranties:
– Generally require strict compliance
– In many states, a plaintiff may rely on a
warranty even if it knew that the statement was
not true when made
Litigating Warranties
� Easier to prove but more limited damages:
– Need not prove scienter or justifiable reliance
– Rescission and punitive damages not available
– Direct or benefit-of-the-bargain damages (or
negotiated remedy)
Litigation Considerations
� Is litigation worth it?
– What’s the amount at risk?
– What limitations on damages exist in the
subject agreement?
– Can the defendant(s) pay?
Litigation Considerations
� Expense
– Discovery (electronic, paper, testimony)
– Opportunity cost
– Adverse publicity (particularly if tried)
– Cost of enforcement (locating and collecting
funds to satisfy judgment)
Litigation Considerations
� Time bars
– Statutes of limitation may differ
– Survival period for representations and warranties
� Business operations and relationships
– Litigation disruption
– Any seller still employed?
– Industry
– Adverse effect on future mergers/acquisitions
SPECIFIC PERFORMANCE
Robert V Spake, Jr. is an attorney in Polsinelli’s
Business Litigation department. Bob combines his
strong advocacy skills, business minded practice,
and specialized knowledge of Delaware corporate
law to partner with clients and effectively resolve
business disputes. His practice focuses on complex
business, derivative, securities, and shareholder
class action litigation in both federal and state
courts throughout the country.
Robert V. Spake, Jr.
Associate
Specific Performance
� Equitable remedy – compelling a party to do
something, rather than suing for money damages.
� Enforced when there is no adequate remedy at law
(e.g., non-compete, non-solicit, and enforcement
of deal closing). Note: Delaware generally honors
a contractual stipulation that a breach of the
acquisition agreement will cause irreparable harm.
Specific Performance
� Specific performance is a common remedy in an
acquisition agreement.
� Protects a seller if the deal does not close due to a
buyer’s breach or a financing failure.
Specific Performance
� Drafting note
– In addition to including language that “The Parties agree
that money damages would not be a sufficient
remedy…”
– Consider the distinction between “shall be entitled to
seek specific performance” and “shall be entitled to
specific performance”
– Latter is more common and creates a stronger right to
specific performance
Specific Performance
� Buyer’s breach or buyer’s remorse
� Force closing
� Common in deals that do not require debt
financing, whether buyer is private equity or
strategic
� Strategic buyers may still offer specific
performance, even when there is debt financing
� Private equity less likely to do so
Specific Performance
� Financing failure
� Force buyer to draw equity and debt financing
(provided debt financing is available)
� If conditions to debt financing are met, seller can
sue buyer to require buyer to enforce the debt
commitment against the banks.
Specific Performance
� Full specific performance
� Conditional specific performance
� Limited specific performance
� No specific performance
Specific Performance
� Full specific performance – seller has the
unconditional right to enforce all of the buyer’s
obligations and close the deal.
Specific Performance
� Conditional specific performance
– Unconditional obligations and obligations conditioned
on funding
– Breadth of condition on funding
Specific Performance
� Limited specific performance
– Right to enforce the funding, but not the buyer’s
obligation to close the deal
Specific Performance
� No specific performance
– Seller has no right to specific performance
– Remedy is terminate the agreement and accept reverse
break-up fee or sue for money damages
LETTERS OF INTENT AND
MEMORANDA OF UNDERSTANDING
Mary Bannister is known for achieving successful
and timely closings of complex business
transactions. She provides strategic legal advice
whether the structure or negotiation involves
acquisition, divestiture, financing or strategic
alliance. Mary has more than 20 years of experience
in a wide range of transactions in the manufacturing
and service industries.
Mary M. Bannister
Shareholder
Letters of Intent
� Letters of Intent (LOI) set forth the key terms of the
proposed transaction as agreed on by the parties
in principle
� An LOI usually is entered to at the beginning of a
transaction before the drafting of transaction
documents
� An LOI usually is not intended to be binding with
respect to the terms of the proposed transaction
Should there be a Letter of Intent?
� No consensus among transaction attorneys as to
desirability
� There is a general understanding that they benefit
Buyers more than Sellers, due to exclusivity
provisions
� Sellers sometimes want them because they are
entered into at a time of Sellers’ greatest leverage
when the Seller can negotiate the best terms
Advantages
� Focuses the negotiations especially if terms are
complicated
� Identifies deal breakers early
� May create a “moral” commitment to the deal terms
making it difficult for a party to change terms later
� May start the waiting period for regulatory approvals (ex:
US antitrust approval)
� May contain important binding provisions (e.g.: exclusivity,
confidentiality)
� Helpful with prospective financing sources
Disadvantages
� Cost
� Negotiation may impair deal momentum
� May create disclosure obligations for public companies
� May unintentionally create a binding commitment
� May create a duty to negotiate in good faith, limiting the
ability to just walk away
� May create “moral” obligations, making it difficult to
change terms later or walk away
Unintentionally Creating a Binding
Agreement
� An LOI typically is intended to be a non-binding expression
of the parties’ then-current understanding of the structure
and terms of the proposed transaction
� Silence as to the non-binding nature may cause a court to
find that it is a binding agreement. The parties
clearlyshould state the LOI is non-binding or risk a breach of
contract claim
� Rarely, a party with great bargaining power insists on a fully
binding LOI
– Later issues arise if the parties cannot agree to the terms of a
definitive agreement; court can impose commercially reasonable
terms to enforce the LOI
Binding Provisions
� Parties may intend that certain provisions of
the LOI be binding.
� Examples:– Exclusivity
– Confidentiality
– Governing Law
– Expenses
– No Third Party Beneficiaries
– Due Diligence Procedures
– Break Up Fees
Binding Provisions
� The binding portions of the LOI must meet
the legal requirements for a binding contract
– Sufficiently certain terms
– Consideration
� Consider which binding provisions will
survive the termination of the LOI
Determination of Binding Nature
� Whether an LOI is binding or not is a question of intent. The language
of the LOI is good evidence of intent and properly should reflect the
intentions of the parties.
� Factors that courts consider:
– LOI language (most important)
– Context
– Are terms definite?
– Partial performance?
– Subject matter of the discussions
� Provisions that are intended to be binding should be specifically
identified and excluded from the portions of the letter that will be
deemed non-binding.
Sample Language
“Other than Paragraphs ___ through ____ (collectively the “Binding
Provisions”) this letter does not constitute and will not give rise to any
legally binding obligation on the part of any of the Parties. Moreover,
except as expressly provided in the Binding Provisions (or as expressly
provided in any binding written agreement that the Parties may enter into
in the future), no past or future action, course of conduct, or failure to act
relating to the Proposed Acquisition, or relating to the negotiation of the
terms of the Proposed Acquisition or any Definitive Agreement, will give
rise to or serve as a basis for any obligation or other liability on the part of
the Parties.”
Subsequent Communications
� Subsequent communications between the
parties have led some courts to find
provisions binding despite language to the
contrary in the LOI
– E-mails
– Handshakes
– Oral statements
Remedies
� If the court finds that the parties intended to be bound
prior to executing a definitive agreement, courts will
generally give effect to that intent
� If certain issues have not been resolved, courts either can
supply commercially reasonable terms or impose a
contractual duty to negotiate a resolution in good faith
� Specific performance is available. E.g.: Rubicon court held
an exclusivity provision is an opportunity, and as such it
cannot readily be reconstructed, nor can it be remedied by
money damages
Creation of Obligation to
Negotiate in Good Faith
� A non-binding LOI still mayobligate the
parties to negotiate in good faith.
� Courts have found that the duty may exist
where the parties intended that there be an
obligation to negotiate in good faith.
� Intent of the parties may be evidenced by
the language in the LOI
Disclaimer of Obligation to
Negotiate in Good Faith
Sample Language
“The parties hereby waive and disclaim the
obligation to negotiate in good faith in
furtherance of its obligations under this letter
of intent.”
Disclaimers
� If adding a disclaimer of the obligation to
negotiate in good faith:
– Include the disclaimer in the binding provisions
– Consider whether it should be disclaimed by
both parties or only one party
Inclusion of a
Good Faith Obligation
� Include any obligation to negotiate in good faith in the
binding provisions
� If you include an obligation to negotiate in good faith:
– No need to complete the transaction to fulfill the duty
– But if parties fail to come to an agreement they may
have to show they did not act in “bad faith”
– Consider adding a definition of “bad faith”
� “radio silence is not negotiating in good faith.” See,
Rubicon
Global Asset Capital v. Rubicon
� Global bid to acquire 12 office buildings owned by Rubicon
contemplating a sale through a bankruptcy supervised auction
� Parties entered into an LOI with an affirmative obligation to negotiate
in good faith to complete a Plan Support Agreement and a no- shop
clause (exclusivity) as well as confidentiality agreements
� Del. Ch. Court stated that it regarded letters of intent, as well as the
duty to negotiate in good faith, as rights of commercial importance and
rights that the Court would protect
� The Court noted that to the extent that parties wish to enter into
nonbinding letters of intent, they can do so by expressly stating that the
agreement is to be nonbinding
� Global Asset Capital, LLC v. Rubicon US Reit, Inc., C.A. No. 5071-VCL
(Del. Ch. Nov. 16, 2009)
“Bad Faith”
� Examples of what could constitute Bad Faith
– Violate exclusivity clause
– Lack of cooperation in due diligence
– Failure to use reasonable efforts to obtain
financing
– Other actions specific to your transaction
Silence Regarding Good Faith
� Depending on the applicable state law, there
may be a duty to negotiate in good faith
even where there is no express obligation to
negotiate in good faith.
� In general, the circumstances must show
that the parties intended such an obligation
even though the LOI is silent.
Remedies – Money Damages
� Generally limited to money damages
– Reliance Damages (expenses of negotiation)
– Expectation Damages (lost profits from failed
transaction)
• Would the agreement have been reached but for
the breaching party’s bad faith negotiations?
Remedies - Specific Performance
� Specific performance generally is not
ordered.
� Exception for where the duty requires a
party to take specified actions such as
providing information
SIGA Technologies Case
� Under Delaware law, agreements to negotiate in good faith, even in
preliminary agreements, are enforceable.
� Proposing deal terms that deviate materially from terms set out in a
term sheet may be deemed to evidence bad faith in negotiations;
� If an obligation to negotiate in good faith is breached, and the
aggrieved party is able to establish that a final, binding agreement
would have been reached absent the other’s bad faith negotiations, the
aggrieved party is entitled to “expectation” or “benefit of the bargain”
damages (e.g., lost profits) rather than simply “reliance” damages (e.g.,
costs and expenses of the failed negotiation).
� Per the court, bad faith “contemplates a state of mind affirmatively
operating with furtive design or ill will.”
� SIGA Technologies v. PharmAthene, 67 A.3d 330 (Del. 2013).
Memoranda of Understanding
and Term Sheets
� Same rules apply as with Letters of Intent.
� No matter the name of the document, have
an attorney review
� Even if unsigned, a disclaimer of intention to
be bound and disclaimer of any legal
obligation of the parties should be included
� If there are binding provisions, best practice
is to use a signed letter of intent
Claims by Acquirers, Sellers and
Unsuccessful Bidders
Thank you, and we hope that you will join us
for our next webinar on March 22, 2016
entitled, M&A Stockholder Claims.
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