Moving Forward in an M&A Transaction “The Art and Science” · PDF fileMoving Forward in an M&A Transaction “The Art and Science ... advising on day-to-day ... Buyer does the

November 2005 1 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM

Moving Forward in an M&A Transaction

“The Art and Science”

Presented to the WMACCA Corporate Law Forum

September 9, 2014

Scott Meza, Esq. Greenberg Traurig, LLC

Samuel E. Logan, Jr.,

Blackboard Inc.

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Panelist Bio: Scott Meza

Scott Meza has more than 25 years of experience assisting businesses in a wide range of complex

transactions, including mergers, acquisitions and spin offs of public and private companies and

sophisticated equity and debt financings and recapitalizations. Scott manages these types of

transactions for technology based companies in addition to companies operating in regulated

environments like government contracting, telecommunications and health care. Representative

transactions include stock-for-stock combinations, cash out mergers, tender and exchange offers,

management buyouts, stock and asset purchases, and distressed company acquisitions, including

bankruptcy auctions, corporate spin offs, divestitures and corporate governance matters.

Scott regularly represents venture funds and emerging growth companies in financing

transactions, such as preferred stock sales and subordinated debt lending and licensing. Scott has

been a leader in organizing networks of accredited "angel" investors that invest in emerging

growth companies around the country. Scott also advises senior management and boards of

directors on executive employment and compensation issues and equity incentive plans.

Scott Meza, Shareholder

Greenberg Traurig, LLP

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Panelist Bio: Samuel E. Logan, Jr.

Samuel E. Logan, Jr. is Assistant General Counsel to Blackboard Inc., serving as chief in-house

lawyer for Blackboard’s M&A activity. Since joining Blackboard in 2010, Mr. Logan has

represented Blackboard on a number of acquisitions and in 2011 helped with Blackboard’s

successful go-private sale to Providence Equity Partners. In addition to his M&A role, Mr. Logan

directs the legal function for Blackboard’s Education Services platform, advising on day-to-day

legal matters such as commercial licensing, vendor management, customer negotiations and

intellectual property.

Prior to joining Blackboard, Mr. Logan spent five years as an associate at Latham & Watkins LLP in

Washington, DC. Mr. Logan’s practice at Latham & Watkins focused on mergers & acquisitions,

private equity, cross-border transactions, corporate governance, and venture capital financings.

He is a graduate of Georgetown University Law Center and Cedarville University, and is licensed

to practice law in New York and Washington, DC.

Samuel E. Logan, Jr.,

Blackboard Inc.

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THE LETTER OF INTENT/TERM SHEET: PRINCIPAL DEAL

TERMS IDENTIFIED

The Letter of Intent sets the stage with basic terms “agreed upon,” including:

Structure of transaction.

(e.g. sale of stock; sale of assets)

“Headline” price (not the “net” price) is set.

A level of “normalized working capital” is required at closing.

Earnout and/or other deferred payment terms are identified but not

detailed.

An escrow/holdback in an undetermined amount is referenced.

The letter of intent references “usual and customary” representations,

warranties, and indemnifications for a transaction of this nature.

Conditions to closing include retention of key personnel, but details aren’t

stipulated in LOI.

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LETTER OF INTENT/TERM SHEET: MAJOR DEAL TERMS

IDENTIFIED

Now it’s time to prepare a Definitive Acquisition Agreement:

We are going to focus on a few key terms of that agreement and examine

the strategy for negotiating and drafting those provisions.

How to structure these key terms from a Buyer vs. Seller perspective

is very different.

Precise drafting is essential; ambiguity in these areas generally

creates cratered deals and post closing disputes.

The letter of intent often gives little direction on how to draft these

terms and there are often huge business and legal rewards and risks

depending on your choices.

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WHO IS ON YOUR M&A TEAM AT THIS POINT IN THE

TRANSACTION?

CAST OF CHARACTERS:

Inside and outside legal counsel need to confer closely to make right

decisions before a draft acquisition agreement is

prepared/exchanged.

Investment bankers may be consulted; can run interference and

“socialize issues” with other side in a different way.

Business decision-makers need to be engaged from the beginning and

key issues should be “outlined” for them.

Some of these agreement provisions will involve detailed accounting

and tax issues. Buyer’s and Seller’s CFOs, tax directors, and outside

accounting firms will often play important roles and should be

selectively engaged in process early on.

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WHO IS ON YOUR M&A TEAM AT THIS POINT IN THE

TRANSACTION? (cont.)

In larger deals, Buyer’s due diligence team will need to identify the risks

in Seller’s business that may influence terms and drafting choices for

the definitive agreement.

Depending on the size of the Buyer, Seller, transaction, the Boards of

Directors and owners may need to be consulted on some of these issues.

Buyer and Seller need to know the “market” terms for their transaction;

What are the ranges of acceptable terms based on type of deal, size,

industry sector, type of Buyer (e.g. private equity firm) etc.?

Outside counsel/investment banker should be able to advise on those

market terms.

Do your homework. There are good sources for guidance and “market”

terms for these key acquisition provisions.

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HAVE CLARITY ON THE NEGOTIATION AND DRAFTING

PROCESS

Next steps drafting the Acquisition Agreement (We will assume a Stock Purchase

Agreement for a mid-market, closely-held business)

Who drafts the Acquisition Agreement?

∙ Generally, Buyer does the first draft.

∙ In some “auction” sales led by investment banker, Seller may prepare a

“bid” draft acquisition agreement, and bidding Buyers must mark up that

draft.

The first drafter has an advantage because it can drive the initial process and

impact final terms of the definitive agreements.

What are the basic types of first draft of the definitive agreement?

∙ “Over the top” aggressively one-sided Buyer draft

∙ Seller “friendly” draft

∙ Middle of the road draft

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HAVE CLARITY ON THE NEGOTIATION AND DRAFTING

PROCESS

That choice has ramifications for the Buyer (and Seller):

∙ “Over the top” approach can kill the deal or cause Seller to

completely redraft, create deal friction, or lengthen transaction

and costs.

∙ Middle of road draft can create good deal climate, shorter back-

and-forth time. But what if Seller comes back with very pro-Seller

mark-up? Does Buyer then lose its first drafter advantage?

Key = be pro-Buyer on the important issues that matter to your client;

go easier on things that don’t matter to your client but may matter to

other side. And leave some room to trade terms.

How to do all of this is the “art” of the deal.

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NEGOTIATING AND DRAFTING SEVERAL KEY ELEMENTS OF

AN ACQUISITION

Attached as Appendix 1 is a list of

material terms in an acquisition

agreement. We are focusing on a few

of these:

(i) purchase price adjustments

(ii) escrows and holdbacks

(iii) Earnouts and deferred

payments

(iv) Net working capital

adjustments

(v) Representations and

warranties

(vi) Certain conditions to closing

(vii) Key indemnification issues

(viii)Employee retention

Purchase Price: It’s Not the

“Headline”; It’s the “Net” that

matters.

Gross Purchase Price:

Is generally set in the term

sheet.

Buyer may seek to change that

price based on results of due

diligence. This price change

needs to be communicated as

early as possible, and ideally,

before first draft is done.

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NEGOTIATING AND DRAFTING SEVERAL KEY ELEMENTS OF

AN ACQUISITION

Purchase price: All cash, stock, or combination? This issue also should be resolved

before drafting the definitive agreement.

Gross Purchase price is subject to certain adjustments

∙ Reduced by escrow/holdback (see below).

∙ Reduced by Seller’s transaction expenses, which may be captured in working

capital adjustment (see below).

∙ Reduced (or increased) by working capital (or sometimes net assets or cash) of

Seller at closing.

∙ Reduced by Seller’s debt.

∙ In some deals, reduces or increases by cash on balance sheet.

∙ Reduced by specified liabilities Buyer does not want to assume.

∙ Potential upward tax adjustments (e.g. gross-up for 338(h)(10) election).

∙ Increasingly, purchase price may be reallocated to fund management carve-out; or

to fund retention pool for key employees (see below).

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NEGOTIATING AND DRAFTING OF SEVERAL KEY ELEMENTS OF AN

ACQUISITION (Escrow or Holdback)

Escrow or Holdback? An escrow or holdback reduces the purchase

price paid at closing and is used to fund indemnity claims by Buyer

post-closing. Escrows require set aside of cash with neutral

escrow agent. Holdbacks allow Buyer to retain that amount.

Is it a cash escrow or is it a holdback by Buyer?

∙ A holdback is a key advantage to Buyer. Requires less money for

Buyer to fund at closing; Buyer keeps the money during the

pendency of an indemnity dispute which gives Buyer leverage in

the dispute.

∙ Seller wants a cash escrow for those same reasons which also

removes Buyer insolvency risk that would make Buyer unable to

pay holdback. (A holdback is usually unsecured.)

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ACQUISITION (Escrow or Holdback) (cont.)

What does the escrow or holdback cover?

∙ To fund indemnification claims by Buyer for breaches of Seller’s representations,

warranties, and covenants and for third party claims made against Buyer that are

Seller’s responsibility

∙ Does it fund a working capital deficit?

∙ Sometimes a separate escrow is established for working capital or other specified

risks.

How much is the escrow/holdback?

∙ Typically, a percentage of the total purchase price

∙ Often there is a significant difference between Buyer and Seller in potential escrow

amount but there is a typical “market” range that should provide guidance.

∙ Buyer should marshall arguments to support larger escrow (e.g. liabilities;

problems with due diligence).

∙ Seller should develop counter argument and think about “swaps” (e.g. higher

escrow for lower total cap on liability.

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ACQUISITION (Escrow or Holdback) (cont.)

How long is the escrow/holdback in effect?

Usually 12-24 months

Cover an audit cycle

Sellers seek staggered release of funds

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EARNOUTS AND DEFERRED PAYMENTS

Earnouts and Deferred Purchase Price Payments.

An earnout is a deferred purchase price payment generally made based on the

performance of the Seller’s business (or some aspect thereof) for a period

following the closing. This is probably the most difficult part of an acquisition

to negotiate and draft.

Metrics for an earnout are often financially based: e.g. EBITDA, revenues, or

achieving specific business or technical goals.

From a Buyer’s Perspective, generally:

Have as few restrictions on how Buyer runs the purchased business post-

closing. Don’t let earnout “tail wag the business dog.”

Have a cap on the amount of the earnout.

Control the process for calculating the earnout using Buyer’s accounting

methodology.

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EARNOUTS AND DEFERRED PAYMENTS (cont.)

Allow Buyer to offset indemnity claims against future earnout payments.

Right to require future purchaser to assume earnout obligation or liquidate at

low or fixed price in the event of such sale.

From a Seller’s Perspective, generally:

Require Buyer to covenant to run the business post-closing in a stipulated way

in order to maximize Seller’s changes of achieving the earnout (e.g., in

accordance with Seller’s past policies; continue to run as separate unit; invest

same amount into marketing and sales efforts; retain key personnel; regular

reporting on results).

No cap on amount earned and a sliding scale for earnout payments below

target. (Avoid all or nothing scenario).

No right of set off against the earnout for indemnity claims.

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Significant liquidation payment if Buyer later sells the business

(or if Buyer itself is sold) before earnout period is completed.

Deemed tax treatment as capital gains, not ordinary income.

EARNOUTS AND DEFERRED PAYMENTS (cont.)

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ACQUISITION (Net Working Capital Adjustments)

Net Working Capital Adjustments.

What is Working Capital?: current assets (e.g. accounts receivable or cash) less

current liabilities (e.g. accounts payable or current portion of debt).

“Working Capital” means (a) the Current Assets of the Company, less (b) the

Current Liabilities of the Company, determined as of the open of business on

the Closing Date.

What Does Buyer Want?

Ensure Seller has enough “net working capital” to fund its operations post-

closing.

Also, Buyer wants to prevent Seller from stripping out cash prior to closing

(e.g. accelerating collection of its receivables and distributing cash to the

owners.)

So Buyer should stipulate in the Acquisition Agreement that there must be a

required level of working capital (e.g. “not less than $1 million of current

working capital”). This is often called a “target” or “peg”.

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ACQUISITION (Net Working Capital Adjustments) (cont.)

Buyer needs input from its finance team to help identify an acceptable level of

working capital to account for fluctuations such as seasonality in Seller’s

working capital and to develop acceptable methodology.

Buyer will want a dollar for dollar reduction in the purchase price if Seller’s

working capital at closing is less than the established amount.

Buyer will also want the right to retroactively reconcile working capital post

closing (60-90 days) to calculate what actual closing working capital turned out

to be.

If Buyer distrusts Seller’s working capital estimates, then Buyer may also want

to create a separate working capital escrow to fund that shortfall (so as to

prevent depleting the regular indemnity escrow fund or having to recover

directly from Seller).

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What Does Seller Want?

To calculate working capital in manner that Seller has historically calculated

working capital in its own financial statements (and in accordance with GAAP).

∙ Remember, GAAP may allow multiple alternatives for the same item.

∙ Often include example of the principles of that calculation on separate schedule. (For

example, use Seller’s method of revenue recognition).

– “‘Working Capital’ shall be, in each case, determined in accordance with GAAP

applied consistently with the methodologies, practices and principles used in

preparation of the Working Capital Schedule and consistent with the illustrative

pro forma calculations.”

∙ Require an increase in purchase price if working capital at closing is higher than

target.

∙ Prevent “double dip” for downward working capital adjustment and indemnity claim,

for the same circumstance.

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Other Choices

Both Buyer and Seller should want an orderly process to resolve working

capital disputes e.g. unresolved disputes go to an independent accountant for

final resolution. Allocation of costs of that accountant should be addressed.

Where Buyer and Seller are not confident of where working capital will be at

closing (or can’t agree on target number), consider using a working capital

“band” or “collar” where no adjustment to purchase price if closing working

capital is “close enough” (e.g. not more than $500,000 greater or less than

stipulated working capital threshold.).

Provide for the working capital adjustment to the purchase price to be made

at the closing based on an estimate of working capital with a later true-up

reconciliation of actual working capital.

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Important Aspects of Seller’s Representations

and Warranties

Seller will be required to make representations and warranties to the Buyer.

Breach or falsity in those representations can result in indemnification claims

against the Seller and the failure to satisfy conditions to Closing. Major areas

for representation include:

Seller’s ownership rights and due authorization of the agreement

Accuracy of its financial statements

Due payment and reporting of taxes

Compliance with its obligations under its material customer, vendor

contracts

Not subject to litigation, claims, or regulatory challenges

Ownership and non-infringement of its intellectual property

Properly structured and operated benefit plans

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and Warranties (cont.)

Compliance with law

Operational issues and results

10(b)(5) type representations

From Seller’s perspective, there are several ways to limit Seller’s

deal risk and exposure to indemnity claims arising from Seller’s reps

and warranties:

Qualify representations by “knowledge” standard

∙ E.g. To Seller’s Knowledge, it has complied with all laws and regulations in the

operation of its Business.

∙ A Seller favorable approach to defining “knowledge”:

– “Knowledge means the actual knowledge without investigation of [limited

number of specific individuals]”

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A Buyer favorable approach:

∙ “Knowledge means the actual knowledge of [wider group of individuals] and the

knowledge that each such person would reasonably be expected to obtain in the

course of diligently performing his/her duties for the Seller and after reasonable

inquiry of his/her direct reports.”

From Seller’s perspective, qualify representations by “materiality”

and “material adverse effect”.

∙ E.g. “Seller has complied in all material respects with all applicable Laws and

Regulations, except where failure to comply would not have a Material Adverse

Effect on Seller or its Business.”

∙ Seller needs to be careful to draft to account for ordinary course of business changes

that occur between signing and closing that will not be grounds for failing to close.

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From Buyer’s perspective, limit use of materiality and MAE to only a

few representations and “scrape” out those qualifiers in connection

with Buyer’s recoverable damages for indemnification (see below).

An essential part of Seller’s protection from indemnification claims

is to prepare a thorough “Schedule of Exceptions” that qualifies

Seller’s representations and warranties. If Seller discloses in that

Schedule existing circumstances that may constitute exceptions to

the accuracy of its representations, it may avoid indemnity liability

with respect to that matter.

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Buyer must review and edit the Schedule of Exceptions to prevent a

Seller from unfairly limiting its exposure on reps and warranties in

an unintended way. Sometimes, Seller’s disclosure or Buyer’s

diligence results may actually cause Buyer to create special

indemnity clauses directed to the circumstances disclosed by Seller.

Buyer will usually require a “bringdown” of representations and

warranties as of closing so the representations must be true as of

date agreement was signed and as of the closing date.

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Addressing Certain Conditions to Closing

Most acquisition agreements drafted in Buyer’s favor state that as a

condition to closing that representations and warranties of Seller

are “true, accurate and complete” as of the closing date.

From a Seller’s perspective, a high priority is to protect the deal from not

closing because of failure of Seller’s representations and warranties at closing.

The following are three basic formulations to address these contesting

priorities:

1. Buyer Favorable. Accurate in all respects:

∙ “Each of the representations and warranties made by Target in this Agreement shall

have been accurate in all respects as of the Closing Date as if made on the Closing

Date.”

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Addressing Certain Conditions to Closing

2. Seller Favorable. Accurate in all material respects:

∙ “Each of the representations and warranties made by Target in

this Agreement shall have been accurate in all material respects

as of the Closing Date as if made on the Closing Date.”

3. Very Seller Favorable. MAE qualification:

∙ “Each of the representations and warranties made by Target in

this Agreement shall be accurate in all respects as of the Closing

Date as if made on the Closing Date, except for inaccuracies of

representations or warranties the circumstances giving rise to

which, individually or in the aggregate, do not constitute and

could not reasonably be expected to have a Material Adverse

Effect.”

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Key Indemnification Issues

Key Indemnification Issues

Almost every acquisition agreement will address the substance

and mechanics for a Buyer to make indemnification claims

against the Seller (and vice versa) for damages arising from

breaches of the Seller’s representations, warranties and

covenants.

This is often the most highly contested part of an acquisition

agreement and presents substantial upside advantages and

downside risks to both Buyer and Seller.

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Key Indemnification Issues (cont.)

The following indemnification-related issues should be addressed in

the acquisition agreement

Survival; Time limitation to Assert Claims

How long does Buyer have post-Closing to make an indemnification claim

against Seller (and against the escrow)?

∙ In some cases, it is an arbitrarily limited time frame, usually between 6 months and

24 months post-closing. The longer the period, the better for the Buyer.

∙ Usually certain types of claims are not time limited, other than by the applicable

statute of limitations, e.g. taxes, due authority, fraud, pending litigation. These are

often referred to as “Fundamental Reps.”

What is the correlation between these time periods to assert claims and the

release of indemnity escrow funds? Often no correlation, in the sense that

usually indemnity claims can be made even after the escrow is released (or

used up).

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Sandbagging (and Anti-Sandbagging)

Another contentious area relates to “sandbagging” and “anti-sandbagging”

clauses in the acquisition agreement.

∙ From Seller’s perspective, what if Buyer knows a representation and warranty by

Seller is untrue before closing and still decides to close the purchase and then bring

an indemnity claim for breach? Seller might propose anti-sandbagging language like

the following:

“No party shall be liable under this Article for any Losses resulting from or relating

to any inaccuracy in or breach of any representation or warranty in this Agreement if

the party seeking indemnification for such Losses had Knowledge of such breach

before Closing.”

∙ From Buyer’s perspective, Buyer wants the “benefit of its bargain” i.e. a company as

it existed at the signing of the agreement. So Buyer may want the following anti-

sandbagging language:

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“The right to indemnification, reimbursement or other remedies based upon

any such representation or warranty will not be affected by any Knowledge

acquired (or capable of being acquired) at any time, whether before or after

the execution and delivery of this Agreement or the closing Date, with respect

to the accuracy or inaccuracy of such representation warranty…”

Types of damages and losses that may be recoverable (or excluded)

under an indemnification claim.

Buyer wants the right to make a broad range of damage claims for Seller’s

breach of representations, warranties and covenants, including “out-of-

pocket” damages, diminution in value, consequential damages, and incidental

and punitive damages. An example of that kind of language:

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∙ “Loss” means any and all losses, damages, dues, penalties, interest, fines, costs,

amounts paid in settlement, judgments, Liabilities, Taxes, costs of investigative,

expenses and fees (including court costs and reasonable attorneys’ or other

professionals’ fees and expenses); provided, that Losses shall only include punitive

(sometimes referred to as exemplary) damages, to the extent such damages are

required to be paid to a third party resulting from a third party claim; and provided,

further, that Losses shall only include consequential or incidental damages to the

extent such damages are reasonably foreseeable or are required to be paid to a third

party resulting from a third party claim.

Conversely, Seller wants to limit those damage claims to actual out-of-pocket,

“direct damages.” An example:

∙ “Limitation of Liability” means notwithstanding anything in this Agreement to the

contrary, in no event shall any Seller be liable for any damages based on a multiple of

earnings, profits or EBITDA, provided, however, that nothing herein shall affect or

diminish Buyer’s rights to recover consequential damages to the extent included in the

definition of “Loss.”

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However, there are other techniques for a Seller to limit or manage its

indemnification risks, including “baskets”, deductibles, thresholds, and

caps on damages.

Baskets provide that Buyer may not seek indemnity until the Buyer’s losses

reach a stipulated dollar amount. Baskets can be a true “deductible” (which is

desirable to Sellers) or “tipping” (which is desirable to Buyers).

For example:

“Sellers shall not be required to indemnify Buyer for Losses until the

aggregate amount of all such Losses exceeds $300,000 (the “Deductible”) in

which event Sellers shall be responsible only for Losses exceeding the

Deductible.”

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If a Buyer agrees to a basket, Buyer would prefer it to be a

“tipping” basket:

“First Dollar Sellers shall not be required to indemnify Buyer for Losses until

the aggregate amount of all such Losses exceeds $500,000 (the “Threshold”) in

which event Sellers shall be responsible only for Losses in excess of [$300,000]

(the “Deductible”).”

In some cases, some types of claims (e.g. taxes, fraud) would be excluded

from the basket.

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Thresholds or “Mini-baskets” provide that an individual claim must be above a

stipulated dollar amount (e.g. $5,000) to even be considered indemnifiable.

Example language:

∙ “Securityholders shall not be required to indemnify Buyer for any individual item

where the Loss relating to such claim (or series of claims arising from the same or

substantially similar facts or circumstances) is less than $25,000.”

The rationale for the Seller for a threshold is to avoid “nickel and dime” type

claims. For Buyer, either reject this concept or provide when enough of these

“nominal” claims exist, this threshold limit will phase out.

Caps on Total Damages provide that with few exceptions (e.g. fraud by Seller,

unpaid taxes), the maximum exposure a Seller may have to Buyer for

indemnification will not exceed a fixed amount (often described as a

percentage of the total purchase price).

Obviously, Seller wants as low a cap, with as few carve-outs as possible. Buyer

wants the opposite outcome.

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In a highly negotiated deal, Seller may also want Buyer’s indemnifiable

damages to be reduced by other elements:

∙ Any insurance proceeds available to the Buyer for that loss.

∙ The net savings from any tax benefits (deductions) the indemnifiable losses produce

for the Buyer.

∙ Buyer has a duty to mitigate its losses, which includes pursuing insurance proceeds

and tax savings.

Buyer should be very careful in agreeing to these types of clauses. For

example, only insurance proceeds actually received on a timely basis for the

identical loss should be considered as offset. Tax savings are hard to pin down

and use as an offset to claims should be resisted by Buyer. Expressly agreeing

to mitigate damages creates a potential built in defense for Seller to challenge

an indemnification claim (and confirm whether case law presumes a duty to

mitigate damages).

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Indemnification for Third Party Claims

∙ Commonly, Sellers will seek to include a provision in the acquisition agreement that

mandates that any claim by a third party made against the Buyer for which it seeks

indemnification against Seller must follow a special process.

For example, assume a customer to Seller sues the Buyer for a pre-closing claim that

Seller should have paid.

1. Seller may request that: Seller gets to defend the third party claim on behalf of

the Buyer at the Seller’s expense since if the third party claim is proven, Seller

may have to indemnify the Buyer for that claim. Conversely, Buyer would prefer

to control the defense of that claim since it impacts Buyer and the business it

bought from Seller.

2. At a minimum, in that event, Buyer should require:

∙ Buyer should be able to participate in the defense of that third party

claim with Buyer’s own counsel, at its expense.

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∙ Seller has the right to defend the third party claim only if Seller admits it

has an obligation to indemnify Buyer if the third party wins its claim.

(This is an effective tool for Buyer).

3. Seller may settle the case only if

∙ Seller pays the third party without any contribution from Buyer.

∙ Buyer does not have to admit liability or agree to other relief.

∙ The third party is not seeking injunctive relief against the Buyer.

∙ Loss of that third party claim would not have material adverse effect on Buyer.

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Return of the Materiality Scrapes

“Materiality Scrapes” As discussed previously, a Seller often

qualifies some of its representations and warranties by

“materiality” or “Material Adverse Effect”. However, Buyers

often seek to disregard those qualifiers for (i) purposes of

determining whether Buyer is entitled to indemnification for

breach of these representations and/or (ii) for purposes of

determining the amount of the Buyer’s indemnifiable losses.

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Return of the Materiality Scrapes (cont.)

Here is an example of Materiality qualifications in representations

and warranties disregarded for all indemnification purposes (i.e. for

determining whether there is a breach and calculating Buyer’s losses

from that breach).

“For purposes of this Article X (Indemnification), the

representations and warranties of Seller shall not be deemed

qualified by any references to materiality or to Material Adverse

Effect.”

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Return of the Materiality Scrapes (cont.)

The following is an example of Materiality qualifications in

representations and warranties being disregarded only for purposes

of calculation of indemnifiable losses:

“For the sole purpose of determining Losses (and not for

determining whether any breach of any representation or

warranty has occurred), the representations and warranties of

Seller shall not be deemed qualified by any references to

materiality or to Material Adverse Effect.”

These “scrapes” are often contested. Sellers argue that if the

materiality and MAE qualifiers are acceptable for representations

and warranties and for closing, why aren’t they good enough for

limiting indemnification and recoverable damages?

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Retention of Key Employees is Big Issue for Sellers

Employee Retention Related Issues

For many Buyers, a crucial element to the success of an acquisition is that key

employees of Seller stay and work for the Buyer after the Closing. Several different

provisions of an Acquisition Agreement come into play to address that goal. For

example.

∙ Buyer may condition closing on key employees executing employment agreements

with Buyer effective at Closing that may include restrictive covenants and non-

competes.

∙ Buyer may specifically require a designated portion of the purchase price proceeds

be used to create a post-closing incentive bonus pool for Seller’s key employees.

∙ Buyer may require Seller to defer making customary severance, bonus payments,

raises in compensation and stock option acceleration prior to closing and repurpose

those payments/benefits as post-closing incentives for key employees.

∙ Conversely, Buyer may require Seller to fund severance, accrued vacation, etc. for

Seller’s non-key employees that Buyer does not want to retain.

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Retention of Key Employees is Big Issue for Sellers

From Seller’s perspective, part of the pushback is to have Buyers fund

these incentive retention payment from their own funds, not deduct that

money from the purchase price. Seller may also limit who are “key

employees” that must sign up with the Buyer as a condition to closing.

Conversely, Seller may require the Buyer to offer a certain level of

compensation and benefits to Seller’s employees post-closing.

Don’t forget the logistical challenges represented by some of these

approaches. For example, having a key employee sign a new employment

agreement as a condition to closing gives that employee significant

leverage.

Some of these issues should be addressed by a thoughtful adoption by

Seller of an incentive equity or comp plan long before closing that

achieves/promotes these post-closing retention objectives.

45

Summary

Assemble and engage your key advisors to contribute to decisions

on these (and other) key issues to be proposed in the draft

Acquisition Agreement.

With respect to key transaction terms, have a feel for what is the

range of possible market based terms, and get advisors with

experience with those terms.

Understand the longer term strategic implications of these key

terms to the overall value of the transaction.

The “devil is in the details.” Sometimes the change of a few

words in these very technical provisions can have a big impact and

materially improve or degrade the “risk/reward” calculus for a

Buyer or Seller.

46

Scott Meza, Shareholder

Greenberg Traurig, LLP

1750 Tysons Boulevard, 12th Floor

McLean, VA 22102

T: 703.903.7587 | [email protected]

Samuel E. Logan, Assistant General Counsel

Blackboard Inc.

650 Massachusetts Avenue, N.W., 6th Floor

Washington, DC 20001

T: 202.463.4860, ext. 2662 | [email protected]

Documents

Moving Forward in an M&A Transaction “The Art and Science” · PDF fileMoving Forward in an M&A Transaction “The Art and Science ... advising on day-to-day ... Buyer does the