Private Company Acquisition Agreements: Drafting Reps, Warranties, Covenants and Closing Conditions

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Private Company Acquisition Agreements: Drafting Reps, Warranties, Covenants and Closing Conditions Leveraging Current Market Trends in Deal Terms When Negotiating Key Contract Provisions THURSDAY, NOVEMBER 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kenneth W. Clingen, Partner, Clingen Callow & McLean, Lisle, Ill. William Price, Growth Law, Sometown, Ill. Iain Wood, Partner, Akin Gump Strauss Hauer & Feld, Dallas 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 Private Company Acquisition Agreements Drafting and Negotiating Representations and Warranties Kenneth W. Clingen Partner, Clingen Callow & McLean

6 Representations and Warranties What is a "Representation"? An assertion of fact true on the date that the party makes the representation What is a "Warranty?" A promise of indemnity if the representation is inaccurate 6

7 Representations and Warranties Purpose of Representations and Warranties: allocate risk between Buyer and Seller disclose material information about the parties, the stock or assets serve as the basis for an indemnification claim affect a party s obligation to close the transaction or terminate the acquisition agreement 7

8 Representations and Warranties Is there a Difference Between Representations and Warranties? Technically, a representation is a statement about a historical fact Warranty is a promise to do something in future Some have suggested that a representation supports a tort cause of action, independent of the contract-based action supported by the breach of a warranty 8

9 Representations and Warranties Buyer and Seller Competing Objectives Buyer wants comprehensive representations and warranties that are not qualified by knowledge or materiality Seller wants to narrow the scope of its representations and warranties and qualify by: Materiality: qualifying the representation or warranty by materiality or what might cause a material adverse affect Knowledge: limiting the representation or warranty to the knowledge of certain individuals of Seller Disclosure: Qualifying a representation or warranty with information disclosed on a disclosure schedule 9

10 Representations and Warranties Equity vs. Asset Transaction Representations and warranties are generally more extensive in equity transactions Buyer is "buying the balance sheet" Representations and warranties in asset acquisitions can be limited May not include financial statement representations Purchase of oil and gas assets Purchase of domain names 10

11 Representations and Warranties What is Material? Materiality? Private companies not subject to SEC regulation of financial statements Financial Reporting Standards Audited financial statement requirement Content of audited financial statements, including footnotes NYSE and NASDAQ provide guidance on material events that require disclosure by reporting entities 11

12 Representations and Warranties Materiality Define Material when possible to avoid disputes of what is material Section of the Disclosure Schedules lists each of the following Contracts (x) by which any of the Purchased Assets are bound or affected or (y) to which Seller is a party or by which it is bound in connection with the Business or the Purchased Assets (together with all Leases listed in Section of the Disclosure Schedules and all Intellectual Property Agreements listed in Section of the Disclosure Schedules, collectively, the "Material Contracts"): 1) all Contracts involving aggregate consideration in excess of $[AMOUNT] or requiring performance by any party more than one year from the date hereof, which, in each case, cannot be cancelled without penalty or without more than [180/[NUMBER]] days' notice; 2) all Contracts that relate to the sale of any of the Purchased Assets, other than in the ordinary course of business, for consideration in excess of $[AMOUNT]; 3) all Contracts that relate to the acquisition of any business, a material amount of stock or assets of any other Person or any real property (whether by merger, sale of stock, sale of assets or otherwise), in each case involving amounts in excess of $[AMOUNT]; 4) except for agreements relating to trade receivables, all Contracts relating to indebtedness (including, without limitation, guarantees), in each case having an outstanding principal amount in excess of $[AMOUNT]; 5) all Contracts between or among the Seller on the one hand and any Affiliate of Seller on the other hand; 6) all collective bargaining agreements or Contracts with any labor organization, union or association. 12

13 Representations and Warranties Materiality Additional Examples of Defining Materiality: Section of the Company Disclosure Schedules sets forth (i) each customer who has paid aggregate consideration to Company for goods or services rendered in an amount greater than or equal to $100,000 for each of the two most recent fiscal years (collectively, the "Material Customers"); and (ii) the amount of consideration paid by each Material Customer during such periods. Company has not received any notice, and has no reason to believe, that any of its Material Customers has ceased, or intends to cease after the Closing, to use its goods or services or to otherwise terminate or materially reduce its relationship with Company. Section of the Company Disclosure Schedules sets forth (i) each supplier to whom Company has paid consideration for goods or services rendered in an amount greater than or equal to $100,000 for each of the two most recent fiscal years (collectively, the "Material Suppliers"); and (ii) the amount of purchases from each Material Supplier during such periods. The Company has not received any notice, and has no reason to believe, that any of its Material Suppliers has ceased, or intends to cease, to supply goods or services to Company or to otherwise terminate or materially reduce its relationship with Company. 13

14 Representations and Warranties Materiality Buyer Favorable: Each Material Contract is valid and binding on Seller in accordance with its terms and is in full force and effect. None of Seller or, to Seller's Knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under) or has provided or received any notice of any intention to terminate, any Material Contract. No event or circumstance has occurred that, with notice or lapse of time or both, would constitute an event of default under any Material Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder. Complete and correct copies of each Material Contract (including all modifications, amendments and supplements thereto and waivers thereunder) have been made available to Buyer. There are no material disputes pending or threatened under any Contract included in the Purchased Assets. Seller Favorable: Except as set forth on Section of the Disclosure Schedules, Seller is not in breach of, or default under, any Material Contract, except for such breaches or defaults that would not have a Material Adverse Effect. 14

15 Representations and Warranties Definition of "Knowledge Knowledge Qualifiers Knowledge qualifiers can reduce the scope of a Seller s representation and warranty. The Acquisition agreement should properly define knowledge. Seller prefers to: limit the number of individuals that will be attributed with knowledge limit the knowledge standard to actual knowledge without any duty of inquiry Buyer prefers to: Expand the number of individuals that will be attributed with knowledge or just use the term Seller Require that the individuals charged with knowledge conduct appropriate inquiry or investigation of various definitions of Knowledge 15

16 Representations and Warranties Knowledge Qualifiers Definition of "Knowledge (cont d) Seller Favorable: "Knowledge of Sellers" means, as to a particular matter, the actual knowledge of the individuals listed on Schedule. "Knowledge of the Company" and "the Company's knowledge" mean the knowledge after reasonable inquiry of the Chief Executive Officer and Chief Financial Officer of the Company, as of the applicable date. "Knowledge of the Sellers" and words of similar import means the actual knowledge (after reasonable internal inquiry of Company Employees) of any Seller. "Knowledge of Sellers or Sellers Knowledge" or any other similar knowledge qualification, means the actual or constructive knowledge of any director or officer of Sellers, after due inquiry. o Any representation or warranty qualified "to the knowledge of Seller" or "to Seller's knowledge" or with any similar knowledge qualification is limited to matters within the actual knowledge of the officers of Seller and the employees of Seller with supervisory duties related to the Assets. 16

17 Representations and Warranties Definition of "Knowledge" Definition of "Knowledge (cont d) Buyer Favorable: "Knowledge" means, with respect to an individual, such individual is actually aware of the particular fact, matter, circumstance or other item, or should be aware of the particular fact, matter, circumstance or other item after reasonable inquiry of such person's direct reports and, with respect to any other Person (other than an individual), any individual who is serving, or who has at any time served, as a director, officer, partner, member, shareholder, executor or trustee of such Person (or in any similar capacity) has, or at anytime had, Knowledge of such fact, matter, circumstance or other item. The Seller is not in material breach or default, and to the Seller's knowledge, no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under the Contractual Obligation ("knowledge" not defined). Who Knows? o Certain of the representations and warranties of Seller are made "to Seller's knowledge" or refer to what is "known" to Seller or of what Seller is "aware." The parties hereto agree that the meaning of such expressions shall with respect to Seller in all cases be understood as comprising the actual knowledge and belief of the corporate officers of Seller without any type of additional investigation thereof. 17

18 Representations and Warranties Disclosure Schedules Disclosure Schedules provide additional information to the Buyer about the Seller s business Seller uses disclosure schedules for exceptions to representations and warranties Disclosure Schedules shift risk to the Buyer limit the Seller s exposure to an indemnification claim Prevent Buyer from terminating the transaction Sellers generally desire broad disclosure to insulate against a later indemnification claim 18

19 Representations and Warranties Disclosure Schedules Updating Disclosure Schedules Seller will often want the opportunity to update disclosure schedules Buyer may restrict Seller s ability to update the disclosure schedules or limit updates to specified schedules Updates and changes to the disclosure schedules may affect other terms of the transaction (purchase price, indemnification baskets and caps, termination rights of Buyer) 19

20 Representations and Warranties Disclosure Schedules Buyer strategy for dealing with Seller disclosure exceptions to representations and warranties: Accept the disclosure; it may not be insignificant to the business Investigate further Adjust the purchase price, basket, or indemnification cap Require the Seller to resolve the issue prior to closing Terminate transaction 20

21 Representations and Warranties Disclaimers of Reps and Warranties Seller desires Buyer to confirm that Seller representations and warranties are confined to the Acquisition Agreement Disclaimers seek to bar any Buyer claims outside of those claims arising from the Acquisition Agreement Disclaimers should be drafted with precision to address what is disclaimed Some disclaimers may be invalid Delaware law requires explicit disclaimers in order for Buyer to waive fraud claims 21

22 Representations and Warranties Disclaimer of Warranties Comprehensive Disclaimer Statement: Disclaimer of Warranties. Sellers make no representations or warranties with respect to any projections, forecasts or forward-looking information provided to Buyer. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT, EACH SELLER IS SELLING THE SHARES (AND THE BUSINESS AND ASSETS OF THE ACQUIRED COMPANIES REPRESENTED THEREBY) ON AN "AS IS, WHERE IS" BASIS AND EACH SELLER DISCLAIMS ALL OTHER WARRANTIES, REPRESENTATIONS AND GUARANTIES, WHETHER EXPRESS OR IMPLIED, AND NO SELLER MAKES ANY (A) REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR (B) ANY IMPLIED WARRANTIES WHATSOEVER. Buyer acknowledges that no Seller nor any of their respective representatives or Affiliates or any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any memoranda, charts or summaries heretofore made available by Sellers or any of their respective representatives or Affiliates to Buyer or any other information which is not included in this Agreement or the Schedules, and no Seller nor any of its respective representatives or Affiliates or any other Person will have or be subject to any liability to Buyer, any Affiliate of Buyer or any other Person resulting from the distribution of any such information to, or use of any such information by, Buyer or any Affiliate of Buyer or any of its agents, consultants, accountants, counsel or other representatives. 22

23 Representations and Warranties No Other Representations or Warranties No Other Representations or Warranties NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY MADE BY THE COMPANY IN THIS ARTICLE (INCLUDING THE DISCLOSURE SCHEDULES THERETO) OR BY THE REPRESENTATIVE IN SECTION, OR BY THE COMPANY IN THE CERTIFICATES TO BE DELIVERED TO PARENT PURSUANT TO SECTION, NO GROUP, COMPANY OR AFFILIATE THEREOF NOR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE GROUP COMPANIES OR THEIR RESPECTIVE BUSINESSES, OPERATIONS, ASSETS, LIABILITIES, CONDITION (FINANCIAL OR OTHERWISE) OR PROSPECTS, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO PARENT, MERGER SUB OR ANY OF THEIR RESPECTIVE AFFILIATES OR REPRESENTATIVES OF ANY DOCUMENTATION, FORECASTS, PROJECTIONS OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FOREGOING. 23

24 Representations and Warranties No Undisclosed Liabilities Buyer Objectives: All liabilities, contingent or otherwise, of Seller are disclosed on: Balance sheet Disclosure schedule Ordinary course liabilities incurred since date of most recent balance sheet Seller Objectives: limit disclosure to what is required to be disclosed under GAAP may not require disclosure of contingent liability if it does not meet GAAP reporting threshold. 24

25 Representations and Warranties No Undisclosed Liabilities Buyer-Favorable Undisclosed Liabilities Representation: Except as set forth in the Balance Sheet or referred to in the footnotes thereto, the Company does not have any liabilities other than: (a) liabilities specifically disclosed on Schedule hereto; (b) liabilities under Contracts of the type required to be disclosed by the Sellers on any schedule hereto and so disclosed or which because of the dollar amount or other qualifications are not required to be listed on such schedule, in each case, excluding liabilities relating to a breach of any such Contract; and (c) immaterial liabilities incurred since the Balance Sheet Date in the ordinary course of business and consistent with past practice not involving borrowings by the Company. Schedule sets forth a list of all current arrangements of the Company for borrowed money and all outstanding balances as of immediately prior to the Closing Date with respect thereto, which outstanding balances will be paid in full on the Closing Date. The Company is not in default in respect of the terms or conditions of any borrowings. 25

26 Representations and Warranties No Undisclosed Liabilities Seller-Favorable No Undisclosed Liabilities Representation: Neither the Company nor any Subsidiary has any Liabilities required to be reflected in financial statements prepared in accordance with GAAP other than(i) those set forth or adequately provided for in a consolidated balance sheet of the Company and its Subsidiaries included in the Financial Statements as of July 31, 2015 (such date, the "Company Balance Sheet Date" and such balance sheet, the "Company Balance Sheet"), (ii) those incurred in the conduct of the Company's and any Subsidiary's business since the Company Balance Sheet Date in the ordinary course consistent with past practice, if such past practice is in accordance with GAAP, and do not result from any breach of Contract, warranty, infringement, tort or violation of Applicable Law, (iii) those that are not in excess of $100,000 individually or $500,000 in the aggregate and (iv) those incurred by the Company in connection with the execution of this Agreement. Except for Liabilities reflected in the Financial Statements, neither the Company nor any Subsidiary has any off-balance sheet Liability of any nature to, or any financial interest in, any third parties or entities, the purpose or effect of which is to defer, postpone, reduce or otherwise avoid or adjust the recording of expenses incurred by the Company any Subsidiary. All reserves that are set forth in or reflected in the Company Balance Sheet have been established in accordance with GAAP consistently applied and are adequate. Without limiting the generality of the foregoing, neither the Company nor any Subsidiary has ever guaranteed any debt or other obligation of any other Person. 26

27 Representations and Warranties No Undisclosed Liabilities Buyer Favorable No Undisclosed Liabilities Representation: Section. No Undisclosed Liabilities. Except as reflected in the Financial Statements, neither the Company nor any of its Subsidiaries has any material Liabilities, other than Liabilities(i) incurred in the Ordinary Course of Business after June 30, 2015(none of which result from, arise out of, relate to, or are in the nature of or caused by any breach of contract, breach of warranty, tort, infringement, or violation of Law); (ii) incurred in connection with the transactions contemplated hereby; or (iii) that have been discharged or paid in full prior to the date hereof in the Ordinary Course of Business. 27

28 Representations and Warranties Sandbagging Sandbagging is a term used to describe the Buyer s right to pursue an indemnification claim against Seller after the closing of a transaction for facts, events or circumstances that, although known to the Buyer, are not disclosed on the disclosure schedules of Seller, and as a result render the Seller s representation and warranty inaccurate. 28

29 Representations and Warranties Pro-Sandbagging Provision Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and the Indemnified Party's right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the Indemnified Party (including by any of its Representatives) or by reason of the fact that the Indemnified Party or any of its Representatives knew or should have known that any such representation or warranty is, was or might be inaccurate or by reason of the Indemnified Party's waiver of any condition set forth in Section. 29

30 Representations and Warranties Anti-Sandbagging Provision Seller shall not be liable under this Article for any Losses based upon or arising out of any inaccuracy in or breach of any of the representations or warranties of Seller contained in this Agreement if Buyer had knowledge of such inaccuracy or breach prior to the Closing. 30

31 Representations and Warranties Materiality Scrape A materiality scrape is a buyer-favorable provision that excludes materiality or other qualifications from representations and warranties for indemnification purposes Example of Materiality Scrape: For purposes of this Article [INDEMNIFICATION ARTICLE], any inaccuracy in or breach of any representation or warranty shall be determined without regard to any materiality, Material Adverse Effect or other similar qualification contained in or otherwise applicable to such representation or warranty. 31

32 Representations and Warranties Materiality Scrape Why a "materiality scrape"? Avoid "double materiality" If there is a basket or deductible for indemnifiable losses, then the materiality or other qualifiers do not invade the basket Seller Strategies: Increase Basket amount Exclude qualifiers for representations and warranties that are not subject to the basket Be more specific in disclosure schedules qualifying representations and warranties (list of material contracts or material litigation, for example) 32

33 Representations and Warranties Materiality Scrape For purposes of determining whether there has been any misrepresentation or breach of a representation or warranty, and for purposes of determining the amount of Losses resulting therefrom, all qualifications or exceptions in any representation or warranty relating to or referring to the terms "material," "materiality," "in all material respects," "Material Adverse Effect" or any similar term or phrase shall be disregarded, it being the understanding of the parties that for purposes of determining liability under this Article, the representations and warranties of the parties contained in this Agreement shall be read as if such terms and phrases were not included in them. 33

34 Representations and Warranties How Many Reps and Warranties The Number of Representations and Warranties of the Parties should be a function of several factors, including: The nature of the transaction Purchase of equity vs. purchase of specific assets The Industry of Seller and Buyer Manufacturing vs. service business The identity of the Buyer (strategic vs. financial) Financial Buyer will often require a greater level of representations and warranties The regulatory environment that affects Seller operations SEC, USDA, FTC, etc. The specific business operations of Seller Does Seller collect personal information? 34

35 Representations and Warranties Expanded Reps and Warranties Privacy and Data Security All information or data of any kind possessed by the Company, including but not limited to, personally identifiable information collected from any source, including consumers ("PII"), aggregate or anonymous information collected from any source, including consumers ("Non-PII") and Employee data, whether collected online or offline (collectively, "Data"), has been collected, by the Company or any other Person, and is being maintained, stored, processed and used by the Company in compliance with all applicable laws. The Company has at all times presented a privacy policy ("Privacy Policy") to consumers prior to the collection of any PII or Non-PII online. The Privacy Policy, and any other representations, marketing materials and advertisements that address privacy issues and the treatment of Data, accurately and completely describe the Company's information collection and use practices, and no such notices or disclosures have been inaccurate, misleading or deceptive. The Company has stored and maintained all Data in a secure manner, using commercially reasonable physical and technical measures, to ensure the integrity and security of the Data and to prevent loss, alteration, corruption, misuse and unauthorized access to such Data. There has been no unauthorized use, access to or disclosure of any Data. The Company has not received any claims, notices or complaints regarding its information practices or use of Data. The Company has not received any written notice from a Governmental Authority or consumer advocacy organization challenging, questioning or inquiring about the Company's Data collection or usage practices. To the Knowledge of the Sellers, neither the Company nor any of its subcontractors has experienced any (a) breach of security, as defined by the Privacy Laws, (b) Breach of Unsecured Protected Health Information as "Breach," "Unsecured Protected Health Information," and "Protected Health Information" are defined by HIPAA, or (c) any Security Incident as "Security Incident" is defined by HIPAA, except, with respect to (c), for those Security Incidents which would not, individually or in the aggregate, reasonably be likely to have a Material Adverse Effect. The Company is in compliance with all guidelines and policies that relate to the Company's business and which are set forth by applicable industry associations and self-regulatory guidelines. The Company has only used Data received from its customers in accordance with its contractual agreements with such customers. The consummation of the transactions contemplated herein will not result in any loss or impairment of the rights to own or use any Data, nor will such consummation require the consent of any third party in respect of any Data. 35

36 Representations and Warranties Privacy and Data Security Data Privacy In connection with its collection, storage, transfer (including, without limitation, any transfer across national borders) and/or use of any personally identifiable information from any individuals, including, without limitation, any customers, prospective customers, employees and/or other third parties(collectively "Personal Information"), Seller is and has been incompliance with all applicable laws in all relevant jurisdictions, Seller's privacy policies and the requirements of any contract or codes of conduct to which Seller is a party. Seller has commercially reasonable physical, technical, organizational and administrative security measures and policies in place to protect all Personal Information collected by it or on its behalf from and against unauthorized access, use and/or disclosure. When acting as a Business Associate of a Covered Entity or Subcontractor of a Business Associate (such terms as defined by HIPAA), Seller has in effect agreements with each such Covered Entity and Business Associate that satisfy all of the requirements of HIPAA, such agreements permit Seller to operate its business as it is presently conducted, and Seller is not in breach of any such agreements. Seller has in effect with each entity acting as a Business Associate or Subcontractor (as defined in HIPAA) of Seller or any of its subsidiaries an agreement that satisfies all of the requirements of HIPAA and 42 CFR Part 2, and Seller is incompliance with all such agreements. Seller has not received any complaint from any person or Governmental Authority regarding Seller's or any of its agents, employees or contractors' uses or disclosures of, or security practices or security incidents regarding, individually identifiable health-related information. With regard to individually identifiable health information, there have not been any non-permitted uses or disclosures, security incidents, or breaches involving Seller or any of Seller's agents, employees or contractors. Seller is and has been in compliance with all applicable laws relating to data loss, identity theft and breach notification, including, but not limited to, applicable laws related to reporting to individuals, customers, governmental or regulatory authorities, the media or credit reporting agencies. 36

37 Representations and Warranties Expanded Reps and Warranties Privacy; Data Security The Company has delivered to Buyer correct and complete copies of all written policies, procedures, and all employee, supplier or third party education and training materials maintained by the Company for at least the previous five (5) years with respect to privacy and personal data protection relating to its employees, customers, suppliers, service providers, or any other third parties from or about whom the Company has obtained personal data ("Company Privacy Policies"). The Company has complied in all material respects with, and has not received any notices of violation with respect to, applicable Laws, Contracts, Company Privacy Policies or any other commitments, obligations or representations concerning privacy and personal data protection relating to its employees, customers, suppliers, service providers, or any other third parties from or about whom the Company has obtained personal data ("Company Privacy Obligations"). No Company Privacy Obligations will impose any restrictions upon the Company's ability to use, possess, disclose or transfer such personal data in the manner necessary to conduct the Business in a manner similar to its conduct prior to Closing consistent with any Company Privacy Policy in effect at the time Company collected such data. To Seller's Knowledge, there are no claims or alleged claims that the Company has violated Company Privacy Obligations and there is no legal proceeding with respect to any potential violation thereof. To Seller's Knowledge, the consummation of the transactions contemplated by the Transaction Documents will not require the Company to provide any notice to, or seek any consent from, any employee, customer, supplier, service provider or other third party under any Company Privacy Policy. 37

38 Representations and Warranties Expanded Reps and Warranties Privacy; Data Security The Company has at all times for the last five (5) years maintained an information security program and used commercially reasonable efforts to maintain appropriate administrative, technical and physical controls, including but not limited to the controls set forth in the Payment Card Industry Data Security Standards, as adopted by the PCI Security Standards Council, LLC, Massachusetts' Information Security Regulations, 201 CMR Â 17.00, and other Company Privacy Obligations, in order to protect the security of all information in any form which comprises the Company Registered IP, Company source code, and confidential information and the personal data relating to its employees, customers, suppliers, service providers, or any other third parties from or about whom the Company has obtained personal data. To Seller's Knowledge, there has been no occurrence of breach, unauthorized access to or any other material weakness which would otherwise contribute to or permit a breach of or unauthorized access to the Company Registered IP, Company source code, confidential information, confidential customer information or personal data relating to its employees, customers, suppliers, service providers, or any other third parties from or about whom the Company has obtained personal data. To Seller's Knowledge, there is no material weakness in the Company's information security program or the Company's information security controls. The Company has not received from any third party audit firm a notification of a material weakness in the Company's information security program or the Company's information security controls to which it has not adequately responded. 38

39 Covenants and Closing Conditions Iain Wood Partner, Akin Gump Strauss Hauer & Feld LLP akingump.com 2015 Akin Gump Strauss Hauer & Feld LLP

40 Timeline (The Four Horsemen of Contracts) Representations & Warranties Covenants (Pre-Closing & Post-Closing) Conditions Indemnification As of a date prior to date of Purchase Agreement (e.g., date of financial statements) Date of Purchase Agreement Period between signing and closing & postclosing At closing necessary to satisfy or waive in order to close Post-closing obligation covering breaches of preand post-closing items, including post-closing covenants 40

41 Pre-Closing Covenants Required to the extent not a simultaneous sign and close Majority of covenants are covenants of the seller and/or the target Covers events and actions to occur between signing and closing, such as: Efforts to close/satisfy closing conditions Conduct of the business (affirmative and negative covenants) Continued due diligence, access and inspection rights (including Phase I and/or II) Required consents and approvals (e.g., third-party, governmental and/or equity holder consents) Anti-trust approvals, including HSR and similar filings Exclusivity; no shop Updates to disclosure schedules and changes in circumstances Employment and benefit plan matters Financing matters D&O insurance matters (equity and merger transactions only) 41

42 Post-Closing Covenants Covers events and actions to occur following the closing, such as: Further assurances Changes of name Maintenance of and access to books and records Delivery of remaining consents and approvals Restrictive covenants (i.e., non-compete, non-solicit, and confidentiality covenants) Removal of assets/transfer of assets from other facilities or locations Tax matters Other deal specific covenants (e.g., transition services, accounts receivable, excluded assets) 42

43 Negotiated Points and Considerations As with representations and warranties, covenants are typically limited by qualifying language (e.g., dollar thresholds, carve-outs and schedule exceptions, use of materiality or material adverse effect qualifiers, the use of efforts standards, and/or references to prior past practice or the ordinary course of business) These qualifications and the covenants and the degree to which they are negotiated depend on the specifics of the transaction and the parties A transaction in a consolidated industry may have increased anti-trust scrutiny and as a result the standards and efforts required to obtain anti-trust approval will be subject to additional negotiation The interaction between termination rights and break-up fees also effects the negotiations with respect to the pre-closing covenants Certain covenants can give rise to indemnification for events not under a party s control (e.g., the covenants regarding the conduct of the business, updates to schedules and similar matters) This is significant as covenants are treated outside of the typical basket and cap limitations in the indemnity that would apply to representations 43

44 Other Considerations Scope of continued due diligence and access in particular with respect to environmental matters and indemnification related to such diligence and access Efforts required to satisfy closing conditions, including efforts standard and required actions (e.g., efforts to seek or assist in satisfying conditions, reasonableness required with respect to consents or approvals, etc.) Anti-trust approvals and efforts required to obtain approvals ( Hell or High Water standard, best efforts, divestitures, etc.) No shop provisions and requirement to obtain equity holder approval, in particular as it relates to potential fiduciary duty issues for public companies Effect of updates to disclosure schedules on closing conditions and indemnification Financing matters and requirements to obtain financing and/or alternative financing 44

45 Conditions Roadmap for closing deliveries and events required to occur prior to closing Typical closing conditions include: Bring down of representations, warranties and pre-closing covenants Delivery of consents and approvals, including anti-trust approvals and equity holder approval Absence of governmental or third party actions prohibiting the transaction Delivery of executed closing deliveries and transaction documents Financing Diligence Material adverse effect 45

46 Negotiated Points and Considerations Limitations and Qualifications: Standard of condition in all respects, in all material respects, in all respects except to the extent not resulting in an material adverse effect? Scope of condition certain conditions are limited by the scope of the delivery for such condition (i.e., all material consents) Key negotiated points Standard of condition Scope of condition Waiver of conditions and deemed waiver Who controls the condition (i.e., Who can waive the condition? Which of the parties must act in order to satisfy the condition)? What is the remedy if a condition is not met (refuse to close, break-up fee, right to extend the time period)? 46

47 Enforcing Your Deal Presenter: William A. Price, Attorney at Law,

48 Part I: Contract Terms CONTAINING Reps and Warranties

49 Contract Representations and Warranties I: Essentials Duly organized entity in good standing Authority in signer and company to do deal Capital structure permits deal: clause also defines whose votes needed: complete corporate book attached, with permissions No third party rights or liens that could prevent or void the deal Good title to all property in deal

50 Representations and Warranties II: Enforceable Financials Financial statements accurate, current, follow GAAP Real property, capital equipment, other asset schedules are accurate Equipment is in good repair except for ordinary wear and tear All taxes paid, no returns due, no tax authority liabilities/investigations pending

51 Representations and Warranties III: Disclosures No undisclosed liabilities Complete A/R schedule is attached Complete A/P schedule is attached All taxes paid, no returns due, no tax authority liabilities/investigations pending No questionable payments/illegal operations Finders fees for deal n/a or scheduled

52 Representations and Warranties IV: No Material Changes No material adverse change in business No sales not in ordinary course No casualty loss beyond defined amount No change in managers or other key employees No liability settled or incurred not in ordinary course

53 Representations and Warranties V: No Material Changes, Continued No change in a/p outside of ordinary course No debt or other obligation beyond $ limit No delay of dividend or other capital return/change of capital structure No change in employment contracts or terms No other material non ordinary agreements

54 Representations and Warranties VI: Intellectual Property Company IP (patents, trademarks, copyrights, trade secrets, etc ) is all current/still protected Company owns all IP/no 3d party permission needed to use same No infringement by Company of 3d party IP rights No IP royalties or other payments due No IP claims or other litigation pending or known

55 Representations and Warranties VII: Contracts And Claims Complete schedule of material contracts attached No lawsuits or administrative actions pending, settlements in force, judgments due (or scheduled) Insurance contracts and schedules are in force as attached No product liability or warranty claims known or likely Employee benefit plans and relations good/in compliance, plans scheduled, no strikes or claims likely (or scheduled)

56 Part II: Contract Terms LIMITING Reps and Warranties

57 Representations and Warranties Limits Routine Lawyer Argument/Negotiation Big Firms Argue For ABA Percentage Loss Limits For all Reps And Warranties: Small For No Limits Additional Terms To Protect Seller

58 ABA Terms Survey Annual Or Biennial Survey Deals Covered Usually $10 million plus in amount/annual sales of companies involved Firms Surveyed Are National/Big Regional Law

59 ABA Terms Survey 2013 Private Target Mergers Deal Points title Working capital adjustments to purchase price most common adjustment in deals Seller earnouts in 25% of 2012 deals All liabilities covered in liabilities rep in 77% of 2012 deals, not just GAAP liabilities

60 ABA Terms Survey 2013 Compliance With Law rep down significantly (33% of 2012 deals, vs. 77% 2010) Material Adverse Effect not defined by dollar amounts in 2012 deals, was earlier (but see cuffs/collars discussion below)

61 ABA Terms Survey 2013 Cuffs time limit for non-essential representations: 18 months limit in 44% of deals 2012: fraud usually an exception to time limits Collars or Baskets limited amount recoverable for non-essential reps/warranty breaches to %ages of deal (mini-baskets possible for specific claims within a rep, such as min. $5k/claim) De minimis amount of total deal (0.5% or 1%) often required for any rep or warranty claims

62 ABA Terms Survey 2013 Cuffs time limit for non-essential representations: 18 months limit in 44% of deals 2012: fraud usually an exception to time limits Collars or Baskets limited amount recoverable for non-essential reps/warranty breaches to %ages of deal (mini-baskets possible for specific reps): 10% overall cap same for 2012, 2010 deals De minimis amount of deal (0.5% or 1%) often required for any rep or warranty claims

63 ABA Terms Survey 2013 Cuffs time limit for non-essential representations: 18 months limit in 44% of deals 2012: fraud usually an exception to time limits Collars or Baskets limited amount recoverable for non-essential reps/warranty breaches to %ages of deal (mini-baskets possible for specific reps): 10% overall cap same for 2012, 2010 deals De minimis amount of deal (0.5% or 1%) often required for any rep or warranty claims

64 Additional Reps And Warranties Limits Terms To Protect Sellers No Sandbag : No relief for items disclosed to buyer/known to buyer before or during due diligence CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990) a warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. Indeed, the warranty's purpose is to relieve a promisee from the obligation of determining a fact's truthfulness. No Sandbag eliminates this protection for buyers with some evidence showing deal problems

65 Purchase Price Escrows To Protect Buyers Escrow Of Purchase Price Amount For Post-Closing Adjustments/Rep and Warranty Claims Period Amount only average 7.14% of 2012 deals, down from 9+% earlier years: Amounts in escrow up to $10 million average for ABA survey deals 2012

66 Part III: Dispute Resolution Options

67 Representations And Warranties Insurance 800 or so of 40K plus deals worldwide in 2014: Significant increases year over year Common demand in smaller public company deals, where speed needed Premium 2-5% of amount protected, usually the purchase price

68 Alternative Dispute Resolution Arbitration clauses are very common in business contracts: avoids home court advantage if there is a dispute: Review where arbitration could occur, too: travel is expensive Only 17% of ABA survey deals made loser pay arbitration costs

69 Alternative Dispute Resolution Some parties leave IP dispute resolution to courts/uspto, not inexpert arbitrators Note Bunge v. Northern Trust Co (623 N.E.2d 785, 252 Ill.App.3d 485, 191 Ill.Dec. 195, IL Ap. 4 Dist 1993): Courts enforce wording vs drafter of warranty: General warranty of validity does not require word infringement for patent infringement to be breach of warranty

70 Fraudulent Transfer Lawsuits Later-discovered seller or related party transfers Uniform statute, attorney s fees and other relief beyond contract possible 2 year statute of limitations (from event, or discovery of fraud, varies)

71 Sue The Intermediaries Business valuation opinions, opinions of counsel, accounting statements all produce litigation Note Geaslen v. Berkson, Gorov & Levin, Ltd., (581 N.E.2d 138, 220 Ill.App.3d 600, 163 Ill.Dec. 187, IL Ap. 5 Dist 1991): Professional has duty of care in preparation of opinion, not one of investigation beyond scope of opinion

72 Sue Interlopers, Or Win On Reps And Warranties If Seller Waffles Third parties often decide to take over a seller if they hear about a deal: CF Texaco v. Pennzoil intentional interference w. contract tort $8+ billion damages, punitives But CF. Indeck v. Norweb, (735 N.E.2d 649, 316 Ill. App.3d 416, 249 Ill.Dec. 45,, IL Ap. 1 Dist 2000): Seller warranty breached when 3d party right of first refusal (agreement disclosed, not exercise of same) exercised: no 3d party interference, since just exercising rights

73 Questions? William A. Price Attorney at Law,