Successful Dealmaking in Today s Challenging Environment: What you need to know

Transcription

1 Hogan & Hartson in partnership with the Association of Corporate Counsel Europe Successful Dealmaking in Today s Challenging Environment: What you need to know Tuesday, April 13, 2010 Hogan & Hartson L.L.P. All rights reserved.

2 Your speaker panel Chair Marten Bezemer Associate General Counsel EMEA Plantronics B.V. Hogan & Hartson speakers Sarah Atkinson Partner, London Dirk Besse Partner, Munich/Berlin Peter Kohl Partner, London Isabelle MacElhone Partner, Paris Hogan & Hartson L.L.P. All rights reserved. 2

3 Introduction Economic Downturn MAC clauses Break fees Market Volatility Earn outs Hogan & Hartson L.L.P. All rights reserved. 3

4 MAC clauses What is a MAC clause? mechanism for allocating risk between seller and buyer allows buyer to withdraw from a transaction in the event of a MAC between signing/closing heavily negotiated used in public and private M&A transactions What form will a MAC clause take? closing condition warranty/termination right for breach Hogan & Hartson L.L.P. All rights reserved. 4

5 MAC definition Private company acquisition Material Adverse Change means any change, event or circumstance which individually or in the aggregate [has resulted][would reasonably be expected to][could] result in any change or effect that is materially adverse to the business, operations, assets, position (financial, trading or otherwise), profits [or prospects] of the [Company][Group, taken as a whole] [or any event or circumstance that may result in such a material adverse change] occurring at any time prior to Completion, [excluding, in any such case, any change, event or circumstance resulting from: (a) (b) (c) (d) (e) (f) any change in stock or other financial markets, interest rates, exchange rates, commodity prices or other general economic conditions; any change in conditions generally affecting the [industry]; any decrease in the value of the [Company][Group taken as a whole] of less than [five]%; any change in laws, regulations or accounting practices; any matter disclosed in the Disclosure Letter [or the Agreed Form Documents]; and any matter effected pursuant to and in accordance with the sale and purchase of the Shares [including the change in control of the Company resulting from the sale and purchase of the Shares] except to the extent that the matters in paragraphs (a) to (c) have an impact on [the Company][Group], which is disproportionate to the effect on other [similar] companies operating in the [industry];] 5

6 MAC definition (cont d) Public company acquisition (Hostile Bid) Since [end of offeree s last financial year or date on which report and accounts were prepared] there has been no material adverse change or deterioration in the business, assets, financial or trading position or profits or prospects of any member of the [wider offeree group] except as: (a) disclosed in the offeree s annual report and accounts for the year then ended; or (b) as publicly announced by the offeree prior to [ ]. Public company acquisition (Recommended Bid) Since [end of offeree s last financial year or date on which report and accounts were prepared] there has been no material adverse change or deterioration in the business, assets, financial or trading position or profits [or prospects] of any member of the [wider offeree group] [which in any case is material in the context of the offeree group taken as a whole] except as: (a) disclosed in the offeree s annual report and accounts for the year then ended; (b) as publicly announced by the offeree prior to [ ]; or (c) otherwise disclosed in writing to the offeror by or on behalf of the offeree prior to [ ]. 6

7 MAC definition (cont d) Key elements of MAC definition potential effects of events object of the deterioration definition of the target MAC exceptions reduction of customers or decline in business delay or cancellation of orders for services or products adverse effect resulting in seasonal reduction in revenues effect of announcement of transaction action required to be taken under the acquisition agreement or at the request of the buyer acts of terrorism or war or weather or other material natural disasters 7

8 Hexion/Huntsman MAC clause Any occurrence, condition, change, event or effect that is materially adverse to the financial condition, business, or results of operations of the Company and its Subsidiaries, taken as a whole; provided however, that in no event shall any of the following constitute a Company Material Adverse Effect: (A) any occurrence, condition, change, event or effect resulting from or relating to changes in general economic or financial market conditions, except in the event, and only to the extent, that such occurrence, condition, change, event or effect has had a disproportionate effect on the Company and its Subsidiaries, taken as a whole, as compared to other Persons engaged in the chemical industry; (B) any occurrence, condition, change, event or effect that affects the chemical industry generally (including changes in commodity prices, general market prices and regulatory changes affecting the chemical industry generally) except in the event, and only to the extent, that such occurrence, condition, change, event or effect has had a disproportionate effect on the Company and its Subsidiaries, taken as a whole, as compared to other Persons engaged in the chemical industry 8

9 Lessons from Hexion/Huntsman The party asserting an MAC (usually the buyer) bears the burden of proof Carve-outs are only relevant if the initial MAC definition is met MAC is not measured by performance versus projections, and will be affected by representations and disclaimers Absent a clear contractual provision, an effect must be durationally significant to constitute an MAC The parties should define their own test of what constitutes an MAC; otherwise EBITDA is the appropriate benchmark 9

10 Pfizer/Wyeth MAC clause Company Material Adverse Effect means an effect, event, development, change, state of facts, condition, circumstance or occurrence that is or would be reasonably expected to be materially adverse to the financial condition, assets, liabilities, business or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that a Company Material Adverse Effect shall not be deemed to include effects, events, developments, changes, states of facts, conditions, circumstances or occurrences arising out of, relating to or resulting from: (A) changes generally affecting the economy, financial or securities markets or political or regulatory conditions, to the extent such changes do not adversely affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in the pharmaceutical or biotechnology industry; (B) changes in the pharmaceutical or biotechnology industry, to the extent such changes do not adversely affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in such industry; (C) any change in Law or the interpretation thereof or GAAP or the interpretation thereof, to the extent such changes do not adversely affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in such industry; 10

11 Pfizer/Wyeth MAC clause (cont d) (D) acts of war, armed hostility or terrorism to the extent such changes do not adversely affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in the pharmaceuticals or biotechnology industry; (E) any change attributable to the negotiation, execution or announcement of the Merger, including any litigation resulting there from, and any adverse change in customer, distributor, employee, supplier, financing source, licensor, licensee, sub-licensee, stockholder, co-promotion or joint venture partner or similar relationships, including as a result of the identity of Parent; (F) any failure by the Company to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period (it being understood and agreed that the facts and circumstances giving rise to such failure that are not otherwise excluded from the definition of a Company Material Adverse Effect may be taken into account in determining whether there has been a Company Material Adverse Effect); (G) any change in the price or trading volume of the Company Common Stock on the NYSE (it being understood and agreed that the facts and circumstances giving rise to such change that are not otherwise excluded from the definition of a Company Material Adverse Effect may be taken into account in determining whether there has been a Company Material Adverse Effect); and (H) compliance with the terms of, or the taking of any action required by, this Agreement. 11

12 Exxon Mobil/XTO Energy MAC clause Company Material Adverse Effect means a material adverse effect on the financial condition, business, assets or results of operations of the Company and its Subsidiaries, taken as a whole, excluding any effect resulting from, arising out of or relating to (B) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Company Material Adverse Effect), changes or conditions generally affecting the oil and gas exploration, development and/or production industry or industries (including changes in oil, gas or other commodity prices), (C) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Company Material Adverse Effect), any change in Applicable Law or the interpretation thereof 12

13 Break fees What is a break fee? Triggering events Legal issues Quantum of recent break fees 13

14 What is a break fee? US Origin Now common place in Europe Various forms of break fees 14

15 Various forms of break fees Break fees arrangement between a bidder and or target company whereby a fee is paid to the bidder if a specified event occurs which prevents the transaction from completing to meet some or all of a bidder s costs Reverse break fee arrangement between a preferred bidder and a target where, in return for a period of exclusivity, the preferred bidder has been willing to pay a fee if it fails to proceed with its indicative offer Reciprocal break fee undertaking to pay break fees to be given by both parties to the transaction, particularly in so called mergers of equals where the relative size of the parties and strength of their negotiating positions are similar Break fee from substantial shareholders a bidder may for example seek a break fee from a substantial shareholder who wishes to dispose of its shares or from a manager who will realize a substantial saving on a public to private transaction 15

16 Triggering events Rejection of the offer by the board A substantial shareholder does not accept the offer Shareholders do not approve the necessary resolutions Breach of the non-solicitation undertaking Breach of representations and warranties Absence of fulfillment of one or several conditions precedent at the closing date 16

17 Legal issues Best interests of the company and directors' duties appreciation by the board proper use of their powers reciprocal break fees easier to justify should not deter a third party from making an alternative proposal size of the fee relevant Financial assistance test different from one country to another but the concept exists everywhere precautions to take a) provide some sort of consideration (it is not a gift) b) do not structure it as an indemnity for costs c) careful drafting mandatory Frustrating action EU Directive quantum 17

18 Quantum of recent break fees In the US, they can reach 3 to 5% of the deal value but should not force shareholders to vote for the deal In January, Goldman Sachs entered into an agreement to acquire the La Francia II concessions from Coalcorp Mining Inc. for $151 million. Coalcorp has agreed to pay a breakup fee of $5.25 million in the event that it terminates the agreement under certain circumstances In the UK, in the 90s, the BP-Amoco merger and the Vodafone Airtouch transaction had breakup fees of respectively $550 and $775 million. Today, 1% seems to be the limit in certain specific circumstances The Alcatel-Lucent merger in 2006 had a reciprocal breakup fee: $250 million if Alcatel terminated $500 million if Lucent terminated For a combined market cap of $36 billion Sap business Objects: 2% of the outstanding equity value (or 86 million) (in 2008) 18

19 Earn out What is an earn out? Risks during earn out period Practical experience Structure of earn out provisions Impact of earn out provisions on public take-overs 19

20 What is an earn out? General definition of earn out provision a variable portion of the purchase price payment after a certain time period following completion of the transaction subject to the achievement of predefined performance indicators Reasons for increasing popularity of earn out provisions restrictive bank financing overcoming the valuation gap Due to the market and financial crisis target valuations differ heavily between sellers and buyers while at the same time purchase price derives from company valuation financing effect for buyer 20

21 Risks during earn out period Risks for seller seller continues to participate in the economic risks of the business buyer could use his new influence in the company to minimize earn out payments buyer could fail to make the earn out payment due to financial difficulties Risks for buyer synergy effect might be smaller than expected due to postponed integration of target into his own group of companies seller if still involved in management - could increase short term management risk in order to increase earn out payment 21

22 Overcoming the risks Earn out provisions should protect the seller from manipulation by the buyer give the buyer the necessary control over the target to manage the target in his interest Provisions to avoid conflicts comprehensive information rights for seller regarding accounting joint audits and/or closing audit regarding benchmark test reasonable consideration of extraordinary effects on performance indicators Arbitration provision 22

23 Practical observations Financial performance indicators depend on the individual situation and should be carefully considered. Commonly used criteria are EBITDA and turnover Types of earn out conditions binary earn out provision earn out payment depends 100% on performance indicator meets benchmark test sliding scale provision amount of earn out payment depending on realization of performance indicators, e.g % earn out payment depending on performance, beginning with minimum realization of 90% of benchmark Sellers are more likely to accept earn out provisions when they have the chance to control the target during the earn out period by holding managing position in the target company receiving shares in the acquiring company If buyer wants to integrate target into the buyer s group immediately after completion earn-out might not be appropriate 23

24 Structure of earn out provisions I Essential elements of an earn out provision Duration Payment Performance indicators Accounting principles Definition and adjustment clauses Benchmark Calculation of variable purchase price Caps Earn out period (typically between 1 and 4 years) Periodical payment or full payment at end of earn out period Financial / non financial performance indicators German HGB / IFRS / US-GAAP Clear contractual provisions on performance indicators, including adjustment clauses for extraordinary factors Fix, cumulative or variable benchmark based either on previous financial figures or on financial projections Allocation of profit between seller and buyer if achieved performance exceeds benchmark Limitation of maximum variable purchase price 24

25 Structure of earn out provisions II Further important aspects when drafting an earn out provision Performance indicators should be objective, comprehensible, target orientated and independent from strategic decisions Extraordinary financial factors should be clearly defined. Otherwise, performance indicators could be modified by intentional manipulation. Examples: costs of integration or financing as a result of the acquisition; extraordinary write-offs or reserves; effects resulting from a change of accounting policies Provisions for extraordinary events during the earn out period such as restructuring, integration into another company, merger Sellers may ask for security for payment of earn-out and/or for payment of interest Arbitration 25

26 Impact of earn out provisions on mandatory public take-over offer Acquisition of at least 30% in a listed German company triggers a mandatory public take-over offer to the outstanding shareholders Due to the principle of equal treatment buyer has to offer the same share price to all shareholders which he paid or agreed to pay in the last six months (Section 31 WpÜG, Sections 3 ff. WpÜG-AngV) So far there is no binding precedent whether earn out payments are relevant to the calculation of the take-over share price BaFin (the German Federal Financial Supervisory Authority) follows a two step approach Earn out provisions are not relevant for the take-over bid document, i.e. the share price offered in the document does not need to consider the earn out provision. However, if the performance indicators finally meet the benchmark and the buyer has to make a payment under the earn out provision the other shareholders accepting the take-over offer have a supplementary pecuniary claim by analogy with Section 31 V WpÜG. 26

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