M&A 2015 CONFERENCE INDIANAPOLIS JUNE 11

Transcription

1 M&A 2015 CONFERENCE INDIANAPOLIS JUNE 11 1

2 What Goes Wrong After the Deal: Post-Closing Claims 2015 M&A CONFERENCE 2015 M&A CONFERENCE 2

3 Panelists David Barrett Partner Faegre Baker Daniels Scott Hebbeler Director Lincoln International Karen DeHaan-Fullerton Assistant General Counsel Zimmer, Inc. David Becker President/CEO, First Internet Bank CEO, DyKnow, RICS 3

4 Main Categories of Disputes Breaches of representations and warranties Purchase Price adjustment disputes (with primary one being working capital) Earn Out Disputes Breaches of Covenants (such as non-competes) Fraud 4

5 Some Facts About Claims 1 Indemnity claims took an average of 8 months to resolve 4% of deals with claims went to litigation or arbitration 18% of deals in SRS study had at least one claim in final week of escrow period Final escrow release delayed in 30% of deals 1 Most of the information from this and slides 6 9 comes from Practical Law Company and the Shareholder Representative Services 2013 study about claims. 5

6 Types of Claims Cross-Section of All Claim Types Other 1% Intellectual Property 6% Regulatory 5% Tax 9% Undisclosed Liabilities 18% Financial Statements 12% Net Working Capital 17% Customer Contract 7% Capitalization 14% Fees & Costs 3% Fraud 1% Appraisal Rights 5% Breach of Fiduciary Duty 2% 6

7 Average Claim Size as Percentage of Escrow Average Indemnification Claim Size as a Percentage of Escrow Appraisal Rights Fraud Fees & Costs Capitalization Customer Contract Employee Financial Statements Intellectual Property Other Regulatory Tax Undisclosed Liabilities 3% 1% 3% 9% 7% 18% 20% 17% 32% 30% 72% 100% 7

8 Types of Claims Against Escrow Accounts Percentage of Deals with Expired Escrows Receiving Each Indemnification Claim Type Appraisal Rights Fraud Fees & Costs Capitalization Customer Contract Employee Financial Statements Intellectual Property Other Regulatory Tax Undisclosed Liabilities 5% 5% 5% 5% 9% 9% 12% 12% 14% 16% 16% 16% 8

9 Average Number of Claims per Basket Type Average Number of Indemnification Claims Per Deal with Basket Type No Basket - 0 Deductible First Dollar Combination Average Size of Indemnification Claims as a Percentage of Escrow in Deals with Basket Type First Dollar - 14% Deductible - 22% Combination - 50% 9

10 Additional Overview Topics Are claims generally avoidable? Importance of pre-closing due diligence Process for bringing claims 10

11 Purchase Price Adjustments GAAP issues Drafting Tips Accounting Referee Other specific examples 11

12 Earn Outs: Some Statistics Health care, technology most popular for earn outs Typical driver from buyer s perspective is uncertainty around future earnings (or disagreement with seller as to what earnings look like) 20-25% of Scott's deals have earn outs 10% in Industrials 30-40% in Health Care According to 2013 ABA study, earn out hurdles were split nearly evenly in being set to (1) revenue, (2) earnings / EBITDA, and (3) other milestones 12

13 Earn Outs: Specific Issues Earn outs sound great in theory Often very difficult to administer Sellers who see their idea changed often have a very difficult time Consulting agreements as alternatives All or nothing / Milestones 13

14 Breaches of Covenants Non-competes most common There are others, such as assisting with vendors, customers, etc. Balancing Act Even for sellers who plan to walk away, not caring about non-compete is bad idea On buy side, you don t want your seller using your capital to compete with you (massive red flag) Let's talk about what you are working on 14

15 Breaches of Reps and Warranties Material adverse change Tax issues Financial statement claims Undisclosed liability claims Capitalization claims 15

16 Fraud Definition of fraud Grant Hill Equity Partners v. SIG Growth Equity Fund 16

17 Other Topics Public company deals Relationship between post-closing integration and post-closing claims Preference of litigation vs. arbitration options 17

18 M&A 2015 CONFERENCE INDIANAPOLIS JUNE 11 18