REPS AND WARRANTIES IN BUSINESS TRANSACTIONS

Transcription

1 REPS AND WARRANTIES IN BUSINESS TRANSACTIONS First Run Broadcast: May 15, :00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Representations and warranties are a marquee feature of virtually every significant transactional document. They are particularly vital in stock and asset acquisitions. Parties often conduct extensive due diligence on the company but wants specific assurances about important facts about which only the company would have the best information. These facts the absence of liabilities or the presence of certain items can be few in number or vast, and they vary according the facts of the transaction. But without reps and warranties about those matters the transaction would never happen. This program will provide you with a real-world guide to the differences between reps and warranties, drafting them in major corporate transactions, and understanding the varying remedies of both. Drafting reps and warranties in major corporate transactions Differences between reps and warranties, and their remedies Relationship between diligence and reps and warranties and what the law says about how one impacts the other Reps and warranties concerning tangible and intangible property title, taxes, transfer restrictions Provisions covering revenue projections, financial statements, and customer lists Capital structure, authorization, and contracts Understanding the limits of reps and warranties what you can ask for, what you can get Speaker: Robert Wollfarth is of counsel in the New Orleans office of Baker, Donelson, Bearman, Caldwell & Berkowitz P.C, where he represents large and small clients across the country with a wide variety of business matters. His practice includes start-up formation, mergers and acquisitions, federal, state and local tax planning and controversy, financing projects and operations, restructuring, buy-outs and dissolution. Mr. Wollfarth received his B.S. from Tulane University and his J.D. and LL.M. from New York University School of Law.

2 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # Address Reps & Warranties in Business Transactions Teleseminar May 15, :00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER May 8, 2018 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:

3 Vermont Bar Association CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: May 15, 2018 Seminar Title: Location: Credits: Program Minutes: Reps & Warranties in Business Transactions Teleseminar - LIVE 1.0 MCLE General Credit 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

4 USING REPRESENTATIONS AND WARRANTIES IN M&A AGREEMENTS Rob Wollfarth Baker, Donelson, Bearman, Caldwell & Berkowitz, PC 201 St. Charles Avenue, Suite 3600 New Orleans, LA Direct: Fax:

5 Presentation Topics Using representations and warranties ( reps and warranties ) in mergers and acquisitions to allocate risk between the buyer and the seller, including, specifically, I. Definition and purpose of reps and warranties II. Relationship of reps and warranties to due diligence III. Scope and timing requirements for the accuracy of reps and warranties IV. Typical qualifications on reps and warranties V. Typical limitations on recovery for breach of reps and warranties VI. Sample pro-buyer and pro-seller reps and warranties

6 What are Reps? What are Warranties? Basic definition: They are each statements by the seller as to the quality, condition, existence, value and/or nature of the assets that the buyer is acquiring from the seller and if such statements turn out not to be true, the buyer can claim breach of the acquisition agreement and seek a remedy against the seller for his losses. The distinction between reps, on the one hand, and warranties, on the other, is largely a distinction without a difference.

7 Purpose of Reps and Warranties Reps and warranties are part of a package meant to contractually allocate risk between the buyer and the seller. Without reps and warranties, the parties are left only with whatever implied warranties there are under the applicable state's law that governs the acquisition agreement.

8 Relationship of Reps and Warranties to Due Diligence Due diligence is an investigation of the legal, financial and strategic aspects of the target. Both reps and warranties and due diligence are needed in an acquisition. However, both have their limitations.

9 When must the Reps and Warranties be True? At signing? At closing? Both?

10 How Truthful must the Reps and Warranties be? In all respects? In all material respects? Except for inaccuracies of reps 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? What if the reps and warranties already have materiality qualifiers built in to them?

11 Typical Qualifications of Reps and Warranties Knowledge Material Adverse Effect No Other Representations and Warranties Non-Reliance

12 Knowledge Qualifier Within the rep or warranty, the seller will indicate that he is making the rep or warranty based on his knowledge by inserting in the rep or warranty, "to my knowledge. Sellers will negotiate for actual knowledge. Buyers will negotiate for constructive knowledge of specified persons such as officers.

13 Material Adverse Effect Qualifier Sample Provision. Within the rep or warranty, the seller will state that the fact represented or warranted is true except to the extent its untruthfulness would not have a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of target. Buyer will negotiate for could not reasonably be expected to have and adding that there would be no MAE on (i) seller s ability to consummate the acquisition, or (ii) Buyer s ability to operate the target immediately after closing in the manner operated by seller before closing. Seller will negotiate for dollar amount threshold and carve outs for force majeure-type events

14 No Other Reps and Warranties Sample provision: Except for the reps and warranties contained in [section of acquisition agreement containing seller s reps and warranties] (including the related portions of the Disclosure Schedules), none of seller, the target or any other person has made or makes any other express or implied rep or warranty, either written or oral, on behalf of seller or the target.* *Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

15 Non-Reliance by Buyer Sample provision: Buyer acknowledges and agrees that the seller has not made and is not making any reps or warranties whatsoever regarding the subject matter of the acquisition agreement, express or implied, except as provided in [section of acquisition agreement containing seller s reps and warranties], and that it is not relying and has not relied on any reps or warranties whatsoever regarding the subject matter of the acquisition agreement, express or implied, except for the reps and warranties in [section of acquisition agreement containing seller s reps and warranties].* *Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

16 Limiting Recovery for Breaches of Reps and Warranties Disallowing sandbagging by buyer Limiting rep and warranty survival period Excluding certain kinds of damages from recovery Applying baskets to indemnification claims Requiring eligible indemnification claims exceed threshold Capping recoverable damages Providing that indemnification is exclusive remedy

17 Anti-sandbagging Provision Meaning of Sandbagging. If the buyer is allowed to sandbag, then even if the buyer discovers a breach of a rep or warranty prior to closing buyer could decide to close and then make a claim for breach of the rep or warranty. The buyer will negotiate for the right to bring an indemnification claim notwithstanding any investigation conducted or any knowledge acquired by buyer at any time, whether before or after the execution and delivery of the acquisition agreement or the closing date. The seller will negotiate for an anti-sandbagging provision which provides that no party shall be liable for any losses resulting from or relating to any inaccuracy in or breach of any rep or warranty if the party seeking indemnification for such losses had knowledge of such breach before closing.

18 Limitation on Survival Period of Reps and Warranties Seller will negotiate for limiting the period over which the buyer can bring a claim for breach of a rep or warranty. Buyer will negotiate for the right to bring a claim whenever it discovers a breach no matter how long after closing or at a minimum, carving certain high risk reps and warranties out of the limited survival period. For most deals, where the buyer and seller end up is cutting off buyer's ability to bring a claim at 12 to 18 months following the closing. Very few deals have survival periods of less than 12 months and very few have survival periods exceeding 18 months.

19 Limitation on Types of Recoverable Damages Limited to out of pocket damages Including/Excluding Diminution in value Incidentals - expenses incurred in dealing with the breach Consequentials - losses that are not a direct result of the breach, but a consequence of the breach Punitives - damages awarded in a lawsuit as a punishment

20 Baskets Sample Deductible Seller 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 seller shall be responsible only for losses exceeding the Deductible.* Sample First Dollar Seller shall not be required to indemnify buyer for losses until the aggregate amount of all such Losses exceeds $300,000 (the Threshold ) in which event seller shall be responsible for the aggregate amount of all losses, regardless of the Threshold.* Sample Combination Seller 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 seller shall be responsible only for losses in excess of $300,000 (the Deductible ).* Carve outs. Certain reps and warranties can be carved out of these. *Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

21 Eligible Claim Threshold Sample provision: Seller 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 $.* *Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

22 Cap on Recoverable Damages Purchase price Amount less than purchase price Some other amount Can negotiate to carve out certain reps and warranties

23 Indemnification as Exclusive Remedy Except perhaps in the case of fraud or any other types of claims that the applicable law does not allow parties to limit by contract, the buyer is not allowed to seek remedies outside of what is written in the acquisition agreement.

24 Standard Rep and Warranty Package Organization Authorization Non-contravention Brokers Fees Capitalization Title to Shares Investment Title to Assets Financial Statements Events Subsequent to Most Recent Fiscal Year End Undisclosed Liabilities Legal Compliance Tax Matters Real Property Intellectual Property Tangible Assets Inventory Contracts Notes and Accounts Receivable Insurance Litigation Product Warranty Product Liability Employees Employee Benefits Guaranties Environmental, Health and Safety Matters Customers and Suppliers Disclosures

25 Standard Reps and Warranties Sample Reps: Organization of Certain Sellers. Seller (if a corporation or other entity) is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation (or other formation). Authorization of Transaction. Seller has full power and authority. This Agreement constitutes the valid and legally binding obligation of seller, enforceable in accordance with its terms and conditions. Seller need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby have been duly authorized by seller. Non-contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate. (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to. or (C) result in the imposition or creation of a Lien upon or with respect to target shares. Brokers' Fees. Seller has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement.

26 Capitalization (for stock acquisition) Sample Rep: All of the authorized capital stock of the target consists of target shares, of which target shares are issued and outstanding and target shares are held in treasury. All of the issued and outstanding target shares have been duly authorized, are validly issued, fully paid, and non-assessable, and are held of record by the seller. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other agreements or commitments that could require target to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the target.

27 Title to Shares (for stock acquisition) Sample Rep: Seller holds of record and owns beneficially the number of target shares set forth next to his, her, or its name in Section of the Disclosure Schedule, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act of 1933 and state securities laws), Taxes, Liens, options, warrants, purchase rights, agreements, commitments, equities, claims, and demands. Seller is not a party to any option, warrant, purchase right, or other agreement or commitment (other than this acquisition agreement) that could require seller to sell or transfer any capital stock of the target. Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of the target.

28 Investment (for stock acquisition) Sample Rep for Buyer: Buyer is not acquiring the target s shares with the intent to sell them in connection with any distribution within the meaning of the Securities Act of Sample Rep for Seller if Seller is Receiving Notes from Buyer: Seller (A) understands that the buyer s notes have not been, and will not be, registered under the Securities Act of 1933, or under any state securities laws, and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering, (B) is acquiring the buyer s notes solely for his, her, or its own account for investment purposes, and not with a view to the distribution, (C) is a sophisticated investor with knowledge and experience in business and financial matters, (D) has received certain information concerning the buyer and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding the buyer s notes, (E) is able to bear the economic risk and lack of liquidity inherent in holding the buyer s notes, and (F) is an accredited investor.

29 Title to Assets Sample Pro Buyer Rep: The target has good and marketable title to, or a valid leasehold interest in, the properties and assets used by it, located on its premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all liens, except for properties and assets disposed of in the ordinary course of business since the date of the Most Recent Balance Sheet. Sample Pro Seller Rep: The target has good title to, or a valid leasehold interest in, the material tangible assets they use regularly in the conduct of its business. Additional Pro Buyer Rep Regarding Tangible Assets: The target owns or leases all buildings, machinery, equipment, and other tangible assets necessary for the conduct of its business as presently conducted and as presently proposed to be conducted. Each such tangible asset is free from defects (patent and latent), has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used and presently is proposed to be used.

30 Financial Statements Sample Rep (Bold reflects added pro buyer language): Attached hereto as Exhibit are the following financial statements (collectively the Financial Statements ): (i) audited consolidated balance sheets and statements of income, changes in stockholders' equity, and cash flow as of and for the fiscal years ended,,,,,,,, and, (the Most Recent Fiscal Year End ) for the target; and (ii) unaudited consolidated balance sheets and statements of income, changes in stockholders' equity, and cash flow (the Most Recent Financial Statements ) as of and for the months ended, (the Most Recent Fiscal Month End ) for the target. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP throughout the periods covered thereby, present fairly the financial condition of the target as of such dates and the results of operations of the target for such periods, are correct and complete, and are consistent with the books and records of the target (which books and records are correct and complete); provided, however, that the Most Recent Financial Statements are subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes and other presentation items.

31 Events Subsequent to Most Recent Fiscal Year End Sample Pro Buyer Rep: Since the Most Recent Fiscal Year End, there has not been any Material Adverse Change. Without limiting the generality of the foregoing, since that date: [listing of events that have not occurred] Sample Pro Seller Rep: Since the Most Recent Fiscal Month End, there has not been any Material Adverse Change. Without limiting the generality of the foregoing, since that date the target has not engaged in any practice, taken any action, or entered into any transaction outside the ordinary course of business.

32 Undisclosed Liabilities Sample Pro Buyer Rep: Neither Target nor any of its Subsidiaries has any Liability except for (i) Liabilities set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (ii) Liabilities that have arisen after the Most Recent Fiscal Month End in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement, or violation of law). Sample Pro Seller Rep: Target has no liability of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP except for * *Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

33 Legal Compliance Sample Pro Buyer Rep: The target, and its predecessors have complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder and including the Foreign Corrupt Practices Act, 15 U.S.C. 78dd-1 et seq.) of federal, state, local, and non-u.s. governments (and all agencies thereof), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against the target alleging any failure to comply. Sample Pro Seller Rep: To the knowledge of any seller, the target has complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and non-u.s. governments (and all agencies thereof), except where the failure to comply would not have a Material Adverse Effect.

34 Tax Matters Sample Pro Buyer Rep: Can be much more extensive including reps regarding: that all taxes dues and owing have been paid withholding obligations possibility of audits waivers of statutes of limitations amount of unpaid taxes Sample Pro Seller Rep: The target has filed all income tax returns that it was required to file, and has paid all income taxes shown thereon as owing, except where the failure to file income tax returns or to pay income taxes would not have a Material Adverse Effect.

35 Litigation Sample Pro Buyer Rep (bold reflects added pro buyer language): Section of the Disclosure Schedule sets forth each instance in which the target (i) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a party or is threatened to be made a party to any action, suit, proceeding, hearing, or investigation of, in, or before (or that could come before) any court or quasi-judicial or administrative agency of any federal, state, local, or non-u.s. jurisdiction or before (or that could come before) any arbitrator. None of the actions, suits, proceedings, hearings, and investigations set forth in Section of the Disclosure Schedule could result in any Material Adverse Effect. None of the sellers and the directors and officers (and employees with responsibility for litigation matters) of the target has any reason to believe that any such action, suit, proceeding, hearing, or investigation may be brought or threatened against the target or that there is any basis for the foregoing. Sample Pro Seller Rep: adds in at the end except where the injunction, judgment, order, decree, ruling, action, suit, proceeding, hearing, or investigation would not have a Material Adverse Effect

36 Customers and Suppliers Sample Pro Buyer Rep: (i) Section of the Disclosure Schedule lists the target s largest customers for each of the two most recent fiscal years and sets forth opposite the name of each such customer the percentage of net sales attributable to such customer. Section of the Disclosure Schedule also lists any additional current customers that the target anticipates shall be among the largest customers for the current fiscal year. (ii) Since the date of the Most Recent Balance Sheet, no material supplier of the target has indicated that it shall stop, or materially decrease the rate of, supplying materials, products or services to the target, and no customer listed on Section of the Disclosure Schedule has indicated that it shall stop, or materially decrease the rate of, buying materials, products or services from the target.

37 10b-5/Full Disclosure Representation 10b-5 Formulation: The representations and warranties contained in this Section do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section not misleading. Full Disclosure Formulation: Seller does not have knowledge of any fact that specifically applies to seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of the seller that has not been set forth in this acquisition agreement.