Excerpt From 1781 PLI

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1781 PLI/Corp 261

Practising Law Institute

Corporate Law and Practice Course Handbook Series

PLI Order No. 22662

January 11-12, 2010

Mergers & Acquisitions 2010: Trends and Developments

*261 SPECIALIZED AREAS OF CONCERN IN ACQUISITION TRANSACTIONS

Eric Simonson

K&L Gates LLP

Copyright 2010 by Practising Law Institute

Copyright 2010 Eric Simonson All Rights Reserved.

If you find this article helpful, you can learn more about the subject by going to

www.pli.edu to view the on demand program or segment for which it was written.

*263 BIOGRAPHICAL INFORMATION

*265Table of Contents

I. CONFIDENTIALITY AGREEMENTS

A. What is a Confidentiality Agreement?

1. For the Potential Target--Private Company

2. For the Potential Buyer--Private Company Target3. Public Company Targets

B. Material Provisions in NDAs

1. Obligation to Keep Confidential

2. What Information is Deemed Covered?

3. What Happens if Someone is Compelled by Law to Make a Disclosure?

4. Standstill

II DUE DILIGENCE IN M&A TRANSACTIONS

A. What is 'Due Diligence'?

B. Why Due Diligence?

1. Understanding the Target and its Business


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2. Discovering Liabilities and Assets and Evaluating them

3. Understanding the Nuts and Bolts of Getting to a Closing

4. Structuring

C. A Due Diligence Request/Checklist

D. Other Due Diligence EffortsIII ENVIRONMENTAL CONSIDERATIONS

A. General

B. Why Environmental Liabilities are Different

1. Risk Assessment

2. Environmental Laws Change

3. Overlapping Laws

4. Potential Claimants

5. Toxins May Migrate

6. Off-Site Disposal

7. Testing May be Inadvisable

8. Continuing Discharge Problems

9. Costs

C. Significant Environmental Statutes

1. Water

2. Air

3. Hazardous Waste

4. Superfund

D. Miscellaneous

1. The Limits of Contractual Protection2. Escrows and Insurance

IV. ANTITRUST AND REGULATORY CONCERNS

A. Antitrust

1. Criteria

*266 2. Filing Fees

3. Exemptions

4. Miscellaneous HSR Matters

5. Changes in FTC Rules

6. Antitrust Concerns Relating to Acquisition Agreements

B. Exon-Florio

1. General

2. Procedure

3. Content of Notice

4. Technical Matters

C. Regulated Industries

1. Insurance

2. Telecommunications

3. Marine Transport

4. Land Ownership5. Health Care


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6. Defense Contractors

APPENDIX 1 Form of NDA

APPENDIX 2 Due Diligence Request List

Excerpt from this article: for your convenience

II. DUE DILIGENCE IN M&A TRANSACTIONS

A. What is "Due Diligence"?

Due diligence is the term commonly applied to the business, financial and legal

investigation of a company undertaken in connection with a possible transaction. The

aim and process of a legal due diligence investigation can vary greatly depending

upon the nature and form of a potential transaction. For example, a due diligence

process for a public offering of securities is in many respects different from that

relating to a private investment, an M&A transaction or a commercial transaction. This

outline will limit its discussion to the legal due diligence process undertaken by a

potential buyer in a typical acquisition transaction. This is not to suggest that a target

company or business or seller will not, under many circumstances, conduct a legaldue diligence investigation of an acquiring company. In most circumstances, some

due diligence of a buyer would be advisable for a target company, and in cases where

the consideration is not limited to an immediate cash payment at closing, extensive

due diligence on a potential buyer may be advisable. Discussion of those

circumstances is beyond the scope of this outline. Furthermore, this portion of the

outline is not intended to be a complete discussion of legal due diligence in

acquisition transactions. An entire book could be written on the subject. Rather, it is

intended to provide some background on why a buyer conducts due diligence and

what sorts of materials a buyer's counsel would generally want to review or consider.

B. Why Due Diligence

The purposes of legal due diligence in an acquisition transaction are numerous. In

many respects, conducting due diligence is the most important activity undertaken by

legal counsel in an M&A transaction.

*272 1. Understanding the Target and its Business

In order to properly represent an acquiring company in an M&A transaction it iscritical, as a first step, to understand not only your own client's business and


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objectives, but also to understand the target and its business and even its

management and owners. Before a lawyer gets down into the weeds of reading

contracts and analyzing litigation, he or she needs to understand the target business

as a whole. How does it make money? Who are its commercial partners? How is

information shared in the organization? Is technology important? Other assets? Whoowns or controls those assets? As a result, the first phase of legal due diligence is

not much different than the general business due diligence conducted by other

members of the transaction team. The greater the understanding, the better a lawyer

will be at proposing transaction structures that meet his or her client's objectives.

2. Discovering Liabilities and Assets and Evaluating them

One of the primary functions of legal due diligence is to uncover not only hidden

liabilities and potential liabilities, but also potential elements of incremental value. In

addition, a properly run legal due diligence process will help identify areas of

concern for post-acquisition integration. At the end of the due diligence process,

counsel must make recommendations to its client whether the proposed transaction is

worth doing at all, or whether modifications in the structure, pricing or other terms

are needed to make the transaction worthwhile to the buyer. All the contractual

protections in the world cannot salvage a transaction poorly due diligenced. It is the

key not only to the appropriateness of a purchase price, but also to process, timing,

post-closing integration and management of the acquired business and ultimately of

extracting value for your client.

3. Understanding the Nuts and Bolts of Getting to a Closing

Legal due diligence also must focus on how to get from here to there, and even if it

is possible. Thus it is important to review contracts, licenses, permits and other

essential elements of conducting a business to determine whether those contracts and

*273 the like will survive a closing of a transaction (and if so, will the terms remain

unchanged and without additional costs), or whether consents will be required or

modifications to those contracts, permits and the like.

4. Structuring

It is simply not possible to structure a transaction adequately without conducting due

diligence. Should the transaction be a purchase of assets? Of stock? A merger? A

triangular merger? Reverse triangular merger? Some other structure? How long

should representations and warranties survive? What limits on indemnification should

be employed? What closing conditions and interim covenants are most appropriate?

None of these can be answered without undertaking legal due diligence. Using

"market" provisions may be easy, but also, depending on the results of due diligence,

may be inappropriate for a particular transaction.


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C. A Due Diligence Request/Checklist

The first step in conducting legal due diligence is to search for as much publicly

available information as you can access regarding the business proposed to beacquired. This generally will involve internet searches, review of all public SEC filings

if the company is an SEC reporting company, a review of press releases, and, in many

cases, ordering UCC lien searches. The second step generally is to prepare a due

diligence request to be served upon opposing counsel and the target company. An

example of a due diligence request checklist is attached as Appendix 2 to this outline.

This particular model could be used as a starting place. It was prepared for an

acquisition of a technology company. In other industry sectors, you would want to

emphasize and request in greater detail other materials (and perhaps exclude some of

the items requested in this model). Requests should be customized for the particular

target company and may be revised as you discover more about the company. The

request is not limited to documents and other written materials. In many cases,

particularly when a target company has been shopping itself for a sale, the target

company will already have prepared a "document room" or "virtual" document room

containing most of the requested items. In other cases, the target merely will collect

the requested materials, indicate where it believes either the request is inappropriate

or there are no such materials, and either send copies of those materials to the *274

buyer's counsel or otherwise permit access to them. In the case of competitively

sensitive materials and a buyer who is a competitor, some materials may not be

available until just before signing definitive agreements or may be available but withrestrictions on who may see them within the buyer's transaction team. The key to

successful legal due diligence is keeping an up to date checklist, conducting a

careful review of the materials by lawyers who understand the deal structure, the

target's business and the interaction between the due diligence review and the

negotiation of representations, warranties, covenants and closing conditions in the

definitive transaction documents, as well as the disclosure schedules, and full and

regular communication with the client and the rest of the deal team.

D. Other Due Diligence Efforts

In addition to documentary due diligence, it is often necessary for lawyers to

personally interview key members of management or submit follow-up questions

based on the documentary review. Do not neglect this part of the process. It often is

the key to understanding the target's business and the actual risks involved for your

client.

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Excerpt From 1781 PLI