M&A Buyer Protection Beyond Indemnification and Escrows

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A M&A Buyer Protection Beyond Indemnification and Escrows Structuring Deal-Specific and Often Overlooked Acquisition Provisions to Minimize Buyer's Risk THURSDAY, SEPTEMBER 19, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Melinda Davis Lux, Member, Wyche, Greenville, S.C. Rita Barker, Member, Wyche, Greenville, S.C. 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 M&A Buyer Protection Beyond Indemnification and Escrows September 19, 2013 Melinda Davis Lux Wyche 44 East Camperdown Way Greenville, SC Phone: (864) Rita Bolt Barker Wyche 44 East Camperdown Way Greenville, SC Phone: (864)

6 Most Common Deal Protections Robust due diligence Indemnification Escrows 6

7 Proliferation of M&A Deal Studies Length of survival period % of deals with minimum claim threshold Basket as % of transaction value Cap as % of transaction value Escrow as % of transaction value Carve-outs from survival period, basket, and cap % of deals with indemnification reduction for tax benefits and insurance proceeds 7

8 Obstacles to Negotiating Deal-Specific Indemnification Protection M&A deal studies define market terms Reluctance to deviate from deal study norms 8

9 Environmental Nuances to Definitions & Indemnification Clarify definitions impacting environmental issues Environmental Laws Hazardous substances Be creative in structuring indemnification obligations Sliding scale 9

10 Obligation to Repurchase Uncollected Accounts Receivable Purchaser shall have the right, by giving written notice (the Receivables Notice ) to Seller on or after 90 days following the Closing Date (the Repurchase Date ), to require Seller to repurchase for cash and without recourse, all of the Accounts Receivable of Seller reflected on the books and records of the Seller on the Closing Date that are uncollected at the Repurchase Date. 10

11 Obligation to Repurchase Uncollected Accounts Receivable Drafting an AR repurchase covenant: What categories of AR must be repurchased? When must Purchaser give notice? When must Seller pay for the AR? What is the purchase price? Are there any limits on how aggressively Seller can pursue collection? 11

12 Obligation to Repurchase Uncollected Accounts Receivable Interplay with other purchase agreement provisions: Working capital adjustment AR representations Indemnification Limitations should not apply to AR repurchase covenant Access to escrow or holdback? 12

13 Pre-Closing Inventory Audit On or immediately prior to the Closing Date, Purchaser and Seller jointly shall conduct a physical audit of all of the Inventory of the Business, and Seller shall deliver to Purchaser a certificate executed by an executive officer of Seller and setting forth, in reasonable detail, the quantity of the Inventory and the Inventory Value. 13

14 Pre-Closing Inventory Audit Drafting an inventory audit covenant: When will the inventory audit occur? Will the inventory audit be conducted jointly? How will inventory be valued? GAAP Consistent with Seller s past practice Consistent with Interim Balance Sheet Any deviations? 14

15 Pre-Closing Inventory Audit Interplay with other purchase agreement provisions: Working capital adjustment Use inventory audit value Inventory representations Seller s audit certificate 15

16 Tax Compliance Certificates Closing deliverables Inquire at state and local level Protection will vary 16

17 M&A Transactional Insurance Buyer can obtain blanket coverage or use to overcome deal obstacles Buyer can use to protect against indemnification gaps Buyer can obtain without Seller s knowledge 17

18 Environmental Insurance A specialized insurance policy that covers liability and cleanup costs associated with pollution exposures On and off-site cleanup costs Third party bodily injury and property damage claims Legal defense expenses 18

19 Types of Environmental Insurance Pollution Legal Liability Contractors Pollution Liability Professional Pollution Liability / Professional Indemnity Remediation Cost Cap Closure / Post-Closure Programs Representation & Warranty and Excess of Indemnity Insurance 19

20 Who should seek environmental insurance? Entities engaged in industrial or manufacturing processes Entities that own, invest in, develop, or manage real estate (especially properties built on former industrial sites or brownfields) Entities that provide commercial real estate or project financing Entities with past, pending, or potential liability for environmental cleanup Entities that face exposure to indoor air quality, mold, or bio-terrorism 20

21 Steps to Secure Environmental Insurance Establish relationship with agent, broker, carrier Provide documentation Industry specific applications Copies of environmental assessments Audited financials Reports of any discharges, releases, spills Emergency Response / Spill Contingency Plans Loss control recommendations and reports 21

22 Setoff Rights as a Deal Protection Customary Setoff Provision: Purchaser shall have the right, but not the obligation, to set off against the Promissory Notes the amount of any indemnification obligation of Seller pursuant to Section X. 22

23 Setoff Rights as a Deal Protection Promissory notes, earn-out payments, and other post-closing payment obligations by Purchaser to Seller provide deal protection opportunities. 23

24 Setoff Rights as a Deal Protection Scope of setoff rights Promissory notes Earn-out payments Post-closing agreements Coverage of setoff rights Indemnification obligations Key representations and covenants Length of setoff rights 24

25 Setoff Rights as a Deal Protection Key Cases: Centurion Air Cargo, Inc. v. United Parcel Service Co., 420 F.3d 1146 (11 th Cir. 2005) Express setoff rights are enforceable 25

26 Setoff Rights as a Deal Protection Key Cases: Automated Print, Inc. v. Edgar, 654 S.E2d 413 (Ga. App. 2007) Setoff rights must be drafted precisely Consider affiliate relationships ESG Bichler and Beven DEI 26

27 Setoff Rights as a Deal Protection Key Cases: Automated Print, Inc. v. Edgar, 654 S.E2d 413 (Ga. App. 2007) Contractual versus equitable setoff rights 27

28 Cross-Default Provisions Purchaser has the right to terminate a postclosing agreement if Seller fails to fulfill its indemnification obligations. Include cross-default provisions in Sellerfavorable agreements 28