Drafting Asset Purchase Agreements: Reps, Warranties, Covenants, Conditions, Indemnity and Other Key Provisions

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Drafting Asset Purchase Agreements: Reps, Warranties, Covenants, Conditions, Indemnity and Other Key Provisions TUESDAY, DECEMBER 15, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David Lee Kovacs, Partner, Moses & Singer, New York Anastasia C. Sheffler-Wood, Stradley Ronon Stevens & Young, Malvern, Pa. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Key Provisions in Asset Purchase Agreements December 15, 2015 Presented by: David Lee Kovacs, Esquire Anastasia Sheffler-Wood, Esquire

6 Outline and Topics Key provisions in Asset Purchase Agreements Sale and Transfer of Assets Representations and Warranties Covenants Conditions Termination Indemnification Confidentiality Jurisdiction and Venue Anticipating and avoiding common drafting and enforcement issues 6

7 Who We Are David Lee Kovacs, Partner Moses & Singer, New York Mr. Kovacs focuses his practice on mergers and acquisitions, joint ventures, strategic alliances, private equity, lending, licensing, business enterprise structuring and formation and dispute and corporate strife resolution. He has represented clients in diverse industries, including those in computer software, Internet, new media, natural health products, information technology, newspapers and magazines, apparel and several others. He has been an active speaker and lecturer at law schools and legal education organizations. Anastasia Sheffler-Wood, Senior Associate Stradley Ronon Stevens & Young, Malvern, PA Ms. Sheffler-Wood focuses her practice on corporate law, representing public and private companies in mergers, acquisitions, restructurings and cross-border transactions. She has extensive experience in middle market ($10 million - $300 million) merger and acquisition transactions. Ms. Sheffler-Wood also handles private equity investments and provides general corporate counseling to clients in numerous industries, including manufacturing, health care and financial services. 7

8 Acquisitions: Asset vs. Stock Purchases Asset and stock purchases are commonly seen deal structures Asset purchase transaction: purchase of the selling company s assets, including contractual relationships and intellectual property purchase price is paid to the company, and the company distributes income to its shareholders company is often an empty shell following the sale Stock purchase transaction: purchase of the selling company s stock only purchase price is paid to the shareholders legal and corporate status of the company generally remains the same except that the stock is owned by the purchaser 8

9 Sale and Transfer of Assets Transfer mechanism for an asset purchase Four categories Transferred Assets or Acquired Assets go to the buyer Excluded Assets stay with the seller Assumed Liabilities go to the buyer Retained Liabilities stay with the seller Separate transfer documents for different types of assets Purchase Price Amount and Timing of Payment; Allocation Escrow Working Capital Adjustment 9

10 Representations and Warranties Representations and Warranties vs. Agreements and Covenants Looking backward vs. Looking forward Describing a state of facts for a prior period vs. Committing to take, or not to take, an action in the future 10

11 Representations and Warranties (continued) Purpose of Representations and Warranties in an Asset Purchase Agreement Right to walk away before Closing (See Conditions) Right to a downward adjustment of the purchase price post Closing ( See Indemnification) 11

12 Representations and Warranties (continued) Types of Representations and Warranties Given by Seller Organization and Qualification of Sellers Authority of Seller No Conflicts; Consents Financial Statements Undisclosed Liabilities Absence of Certain Changes Material Contracts Title to Purchased Assets 12

13 Representations and Warranties (continued) Types of Representations and Warranties Given by Seller Condition and Sufficiency of Assets Real Property Intellectual Property Inventory Accounts Receivable Customers and Suppliers Insurance 13

14 Representations and Warranties (continued) Types of Representations and Warranties Given by Seller Legal Proceedings; Government Orders Compliance with Laws; Permits Environmental Matters Employee Benefit Matters Employment Matters Taxes Full Disclosure 14

15 Representations and Warranties (continued) Types of Representations and Warranties Given by Purchaser Organization of Purchaser Authority of Purchaser No Conflicts; Consents Brokers Sufficiency of Funds 15

16 Representations and Warranties (continued) Certain Drafting and Negotiating Issues Materiality To the best of Seller s knowledge It is all about allocation of risk Exclusions set forth in Disclosure Schedules Exclusions for information in data room 16

17 Covenants Covenants in M&A Transactions What is a covenant? Pre-closing covenants Apply between signing and closing Seller makes interim operating covenants regarding operation of target in the ordinary course Deal specific pre-closing covenants may relate to due diligence findings Other pre-closing covenants relate to completion of the deal Best efforts to consummate No-shop clauses Fiduciary outs 17

18 Covenants (continued) Post-closing covenants Only applies after closing Common seller post-closing covenants Restrictive covenants Restrictions on seller dissolution and distributions Further assurances Common buyer post-closing covenants Agreement to honor the indemnification obligations of the target company An agreement to make employment offers to the target s employees 18

19 Covenants (continued) Common mutual post-closing covenants Maintain business records of the target Transfer of third-party contracts for which required consents were not obtained Agreements allocating responsibility between the parties for payment of transfer taxes and other acquisition expenses Impact of earn-outs on post-closing covenants 19

20 Closing Conditions Purpose of Conditions to Closing Simultaneous signing/closing vs. Non-simultaneous signing/closing 20

21 Closing Conditions (continued) Types of Conditions to Closing Conditions to Obligations of All Parties HSR Compliance No Governmental Prohibitions Conditions to Obligations of Purchaser: Representations and Warranties are true and correct as of the Closing Date Compliance with Agreement No Litigation Approvals; Consents; Waivers 21

22 Closing Conditions (continued) Types of Conditions to Closing No Material Adverse Change Delivery of Transaction Documents Purchaser Received Permits Release of Encumbrances Seller Closing Certificate Secretary s Certificate 22

23 Closing Conditions (continued) Types of Conditions to Closing Conditions to Obligations of Seller: Representations and Warranties are true and correct as of the Closing Date Compliance with Agreement No Litigation Approvals; Consents; Waivers Delivery of Transaction Documents Purchaser Closing Certificate Secretary s Certificate 23

24 Closing Conditions (continued) Certain Drafting and Negotiating Issues Double materiality Read out materiality for MAE qualifiers for representations and warranties but subject to overall MAE (with some exceptions) Financing out Financial or operating targets 24

25 Termination Standard Reasons for Termination Mutual Consent Material Breach of, inaccuracy in or failure to perform a representation, warranty, covenant or agreement Failure to meet a closing condition Legal impediment Effect of Termination Agreement becomes void except for clauses that survive (e.g., confidentiality provisions, miscellaneous provisions, termination provisions themselves, etc.) Possible termination fee Termination does not preclude liability for breach 25

26 Indemnification - Overview Indemnification in Context Scope of Indemnification Survival of Representations, Warranties and Covenants Limitations on Indemnification Indemnification Procedures 26

27 Indemnification in Context In commercial agreements, indemnification is often limited to third-party claims One party reimburses the other party for claims brought by third parties Applies when the party most likely to be sued is not the party at fault E.g., a manufacturer indemnifies a distributor against product liability claims from retail customers Claims between the parties are claims for breach of contract, not indemnification In acquisition agreements, claims between the parties are also subject to indemnification Attorneys fees, which are not normally recoverable in a breach of contract claim, are recoverable as indemnified losses 27

28 Scope of Indemnification The claims and losses subject to indemnification will be very broadly defined E.g., all claims, proceedings, losses, damages, liabilities, obligations and expenses Will expressly include reasonable attorneys fees May exclude non-cash losses, such as diminution in the value of the business May exclude incidental, consequential, punitive or other categories of damages The related parties to whom indemnification is available will be similarly broadly defined E.g., Purchaser and its affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives. 28

29 Scope of Indemnification (continued) Indemnification will be available for claims and losses arising out of: Breaches of representations and warranties Should be its own subsection Materiality qualifiers may be disregarded in calculating losses Although the words will be parallel, Seller s more extensive reps and warranties mean that the Seller s indemnification obligation is more significant Breaches of covenants In an asset deal, Assumed Liabilities (indemnified by Purchaser) and Excluded/Retained Liabilities (indemnified by Seller). Specific matters listed on disclosure schedules for which the parties agree that Seller is to remain liable E.g., Seller discloses pending litigation on a schedule, so there is no breach of the no claims representation Absent an express indemnification right, Purchaser will have no right to recover the post-closing costs of the litigation from Seller 29

30 Survival Survival Periods for Reps and Warranties Fundamental representations typically survive indefinitely Should include organization, good standing, authority, execution delivery and enforceability In a stock or merger deal, should also include title to shares and capitalization Indefinite survival may be unenforceable as against public policy Some representations survive through the applicable statute of limitations Typically tax, environmental and employee benefits reps; sometimes undisclosed liabilities, no conflicts, intellectual property Statute of limitations may be tolled, e.g., until a tax return is filed or an environmental claim is discovered Remaining representations survive for an agreed period Typically 1 to 2 years, with 18 months most common The period is often chosen to ensure that a full audit cycle is covered 30

31 Survival (continued) Covenants should not be subject to a limited survival period. If mentioned at all, covenants should survive in accordance with their respective terms Pre-closing covenants will expire at closing Post-closing covenants (e.g., non-competition, confidentiality) should have an express term Effect of Survival Requirement Claims must be brought within the applicable survival period If timely brought, claims continue until resolved Escrow release typically coincides with expiration of survival period TIP: When cross-referencing, include the Section name parenthetically after the number, so that numbering changes will not inadvertently change the substance of the agreement 31

32 Limitations on Indemnification Caps Maximum amount that a party is liable to indemnify with respect to one or more categories of claims Should only apply to indemnification claims based on breaches of reps and warranties, not covenants Reps and warranties, together with disclosure schedules, constitute a description of a business, and the cap on indemnification for breaches of reps and warranties recognizes that such a description will always be somewhat inexact; the same argument does not apply to covenants TIP: Check the cross-reference carefully! Based on a recent study published by the ABA, deal caps averaged approximately 20% of the purchase price 5% of deals were capped at 100% of the price Almost 50% of deals were capped at 10% or less of the price Smaller deals tend to be subject to higher percentages 32

33 Limitations on Indemnification (continued) Baskets / Thresholds / Deductibles Aggregate claims must exceed this amount before indemnification is available Basket / Threshold: Once the specified amount is surpassed, claims are indemnified from the first dollar E.g., if a party has aggregate claims of $150 subject to a $100 basket or threshold, the party may recover $150 Deductible: Once the specified amount is surpassed, only claims in excess of that amount are indemnified. E.g., if a party has aggregate claims of $150 subject to a $100 deductible, the party may recover only $50 Based on a recent study published by the ABA, baskets/thresholds averaged approximately 1% of the deal value, up to a maximum of 5% For a given deal, a deductible would generally be lower than a basket or threshold 33

34 Limitations on Indemnification (continued) De Minimis Exclusions Individual claims must exceed this amount before they count toward a basket / threshold or deductible E.g., if a party has 100 claims of $50 each, subject to a $100 de minimis exclusion, the party may not recover any portion of the $5,000 aggregate claim Based on a recent ABA study, 23% of deals had such a de minimis exclusion Third-Party Recoveries Insurance: The indemnified party may be required to pay over any insurance recovery it receives for the indemnified loss Taxes: An indemnification claim may be subject to reduction based on a tax benefit received by the indemnified party 34

35 Indemnification Procedures Because the indemnifying party is the true party in interest with respect to monetary claims by third parties, indemnification of such claims is subject to requirements such as: The indemnified party shall give timely notice of the claim, in reasonable detail, to the indemnifying party The indemnifying party may elect to defend the claim with counsel reasonably acceptable to the indemnified party When acting as Seller s counsel, resist any requirement that Seller admit that a claim is indemnifiable before permitting the Seller to assume the defense The indemnified party may participate in the defense with its own counsel at its own expense, subject to the indemnifying party s right to control the defense Absent consent of the indemnified party, the indemnifying party may not agree to the entry of any judgment or any settlement that admits liability or provides for equitable (including injunctive) relief that would bind the indemnified party 35

36 Confidentiality Confidentiality Agreements in Acquisition Transactions Why confidentiality agreements or covenants? When do parties enter into NDA s? Should an NDA be separate from the LOI or APA? Mutual vs. unilateral NDA s What information is protected? All confidential or proprietary information of the disclosing party 36

37 Confidentiality (continued) What information is not protected? Publicly known Available on a non-confidential basis Already in the receiving party s possession Available through a third party Independently developed What actions are prohibited? Prohibition on disclosure Prohibition on use Exception: compelled disclosure 37

38 Confidentiality (continued) Termination of the confidentiality agreement or covenant Indefinite term Return of confidential information Additional provisions that may be included Disclaimer of any representation or warranty Disclaimer of any license grant Obligation to inform of unauthorized disclosure If the disclosing party is a public company If the potential buyer is a competitor Limitations on the efficacy of confidentiality provisions 38

39 Jurisdiction and Venue Governing law Forum selection/submission to jurisdiction Jury trial waiver 39

40 Contact Information Anastasia Sheffler-Wood Stradley Ronon Stevens & Young David Lee Kovacs Moses & Singer