Key Deal Terms in Public and Private Mergers & Acquisitions Cam Rusaw Alex Moore April 30, 2014
Outline 1. Private M&A Deal Points Key Deal Points Indemnity Cap Basket/Deductible Survival Periods Sandbagging Escrow/Holdback Representation and Warranty Insurance Shareholder Representatives Opinions 2. Public M&A Deal Points Key Deal Points Regulatory Approval Covenants Deal Protections Break Fees Reverse Break Fees Confidentiality/Standstill Agreements 2
Deal Point Studies ABA 2013 Canadian Public Target M&A Study 89 Canadian deals (2011-2012) ranging in size from $100M - $19.5B ABA 2012 Canadian Private Target M&A Study 64 Canadian deals (2010-2011) ranging in size from C$5M - C$2.25B (3 were >$500M) Equivalent ABA US Private Target and Public Target Studies JP Morgan 2012 M&A Holdback Escrow Report 385 JP Morgan US escrow deals (2011) Although deal points studies are indicative of general market trends, each deal must be considered in the context of the specific circumstances M&A deals (esp. private) are highly negotiated based on the specific circumstances 3
Private M&A Deal Points
Private M&A Key Deal Terms Indemnity Caps Most deals include an overall cap on seller's liability Can. 72% US 93% Indemnity cap still higher in Canada than in US Canadian average 33.56% (26.6% in 2010; 65.3% in 2008) US Average 16.6% <10% of purchase price 3% (48% in US Study) 10% - 25% of purchase price 25% (45% in US Study) >25% - 50% of purchase price 18% (2% in US Study) >50% of purchase price 14% (0% in US Study) Purchase Price 40% (5% in US Study) 5
Private M&A Key Deal Terms Indemnity Caps Carve-out for certain reps/covenants Fraud (Can. 35%; US 79%) Taxes (Can. 13%; US 52%) Fundamental reps (Can. 11% - 24%; US 34% - 63%) Intentional breach (Can. 22%; US 28%) Breach of covenants (Can 9%; US 28%) 6
Private M&A Key Deal Terms Basket/Deductible Tipping basket (first dollar) Can. 59% US 32% Size of Tipping Basket Avg % of purchase price 0.43% (.75% - 2010) 0.46% Min % of purchase price 0.01% (0.1% - 2010) 0.02% Max % of purchase price 1.21% (4% - 2010) 1.60% 7
Private M&A Key Deal Terms Basket/Deductible Deductibles more common in US Can. 14% US 59% Size of Deductible Avg % of price 1% (1.76-2010) 0.61% Min % of price 0.89% (0.1% - 2010) 0.03% Max % of price 1.38% (11.2% - 2010) 2.50% Combination basket Can. 7% US 5% 8
Private M&A Key Deal Terms Basket/Deductible Carve-out for certain reps/covenants Fraud (Can. 37%; US 61%) Taxes (Can. 18%; US 56%) Fundamental reps (Can. 11% - 20%; US 34% - 70%) Breach of covenants (Can. 11%; US 27%) De minimus threshold for individual claims (% deals with baskets) Can. 19% US 30% 9
Private M&A Key Deal Terms Survival Periods Survival period for representations (% of deals): 24 months 47% (8% in US Study) 18 months 12% (44% in US Study) 12 months 17% (22% in US Study) Carve-out for certain reps/covenants Fraud (Can. 66%; US 42%) Taxes (Can. 66%; US 71%) Fundamental reps (Can. 25% - 51%; US 17% - 75%) Environmental (Can. 28%; US 33%) Breach of covenants (Can. 24%; US 35%) 10
Private M&A Key Deal Terms Sandbagging Pro-sandbagging (benefit of the bargain) Seller's indemnity liability not affected by buyer's knowledge of misrepresentation Anti-sandbagging Seller not liable if buyer knew of misrepresentation Pro-Sandbagging provision 24% (41% in US) Anti-Sandbagging provision 9% (10% in US) Silent 67% (49% in US) 11
Private M&A Key Deal Terms Escrow/Holdbacks Escrows/holdbacks becoming more common Can. 52% US 89% Escrows/holdbacks as % of transaction value: Less than 3 % 3% - 5% 6% 12% (10% in US Study) (22% in US Study) 5% - 10% 47% (37% in US Study) 10% - 25% 23% (23% in US Study) More than 25% 12% (1% in US Study) 12
Private M&A Key Deal Terms Escrow/Holdback Duration of Escrow 24 months 10% 18 months 12 months 30% 27% Multiple escrows (23%) General indemnity claims Working capital or other adjustments Source: JP Morgan 2012 M&A Holdback Escrow Report 13
Private M&A Key Deal Terms Escrow/Holdback Fees usually split 50-50 (76%) Interest usually accrues to seller (63%) Claims 33% result in at least one claim (7% multiple claims) Working capital adjustments 32% Other adjustments 23% Fees & costs 14% Financial statements 11% Undisclosed liabilities 7% Taxes 7% 52% of claims within 6 months, 10% more than 18 months Source: JP Morgan 2012 M&A Holdback Escrow Report 14
Private M&A Key Deal Terms Representation and Warranty Insurance Insurance product Historically underutilized but becoming more common in US Historic concerns Market has evolved Issues remain A tool, not a panacea Common scenarios Seller wants to reduce or eliminate post-closing liability Seller needs to reduce or eliminate escrow/holdback Indemnity not available or buyer concerned about collectability (distressed seller; trustee in bankruptcy; shell companies) Buyer reluctance to sue employee sellers Competitive bidding process (strategic) Bridge gaps in negotiation Buyer policies and seller policies 15
Private M&A Key Deal Terms Shareholder Representatives Emerging trend in US; coming to Canada Professional third party service provider Act as selling shareholder representative to manage post-closing price adjustments, earn-outs, escrows, indemnity claims Information conduit Administrative tasks Manage disputes/claims SRS Acquiom LLC 16
Private M&A Key Deal Terms Opinions Opinions (Non-Tax) Required 45% (27% in US Study) Not Required 55% (73% in US Study) 17
Public M&A Deal Points
Public M&A Key Deal Terms Regulatory Approval Covenants Deals where specific regulatory approval required (e.g. Competition Act, Investment Canada Act; CRTC etc.) No 20% If yes, standard of efforts Commercially Reasonable Efforts 96% Yes 80% Best Efforts 4% 19
Public M&A Key Deal Terms Regulatory Approval Covenants 50% 45% 45% 40% 35% 30% 27% 25% 20% 18% 15% 10% 5% 3% 3% 10% 0% No Limitation Material Impact Cap Quantified Dollar Impact Hell or High Water No Obligation to Divest or Restrict Operations Other* 20
Public M&A Key Deal Terms Regulatory Approval Covenants Not Included 18% Included - Specific 7% Included - Non- Specific 75% 21
Public M&A Key Deal Terms Deal Protections Fiduciary Out to Non-Solicitation Covenant Actual "Superior Proposal" 28% (2% in US Study) Acquisition Proposal Reasonably Expected to Result in "Superior Proposal" 72% (98% in US Study) 22
Public M&A Key Deal Terms Deal Protections Fiduciary Out Trigger Language Inconsistent with Fiduciary Duties 71% Actual "Superior Proposal" or Acquisition Proposal Reasonably Expected to Result in a "Superior Proposal" (no Fiduciary Duty Language) 20% Breach of Fiduciary Duties 2% Necessary to Discharge Fiduciary Duties 7% 23
Public M&A Key Deal Terms Deal Protections Go shop No "Go Shop" 97% (94% in US Study) "Go Shop" 3% (6% in US Study) 24
Public M&A Key Deal Terms Deal Protections Fiduciary out to board recommendation covenant Limited to "Superior Proposal" Only 65% (22% in US Study) If Fiduciary Duties Require 17% (22% in US Study) Back Door Fiduciary Exception 12% (7% in US Study) Buyer MAE 6% 25
Public M&A Key Deal Terms Deal Protections Match right 100% of Canadian deals have match right (89% in US) Less than 3 Business Days 1% (3% in US Study) 3 Days 7% (4% in US Study) 3 Business Days 11% (40% in US Study) 4 Days 1% (3% in US Study) 4 Business Days 7% (24% in US Study) 5 Days 3% (5% in US Study) 5 Business Days Greater than 5 Business Days 6% (0% in US Study) 64% (21% in US Study) 26
Public M&A Key Deal Terms Deal Protections Target Break Fees - Naked No-Vote Includes "Naked No-Vote" Fee or Expense Reimbursement 17% (25% in US Study) No "Naked No- Vote" Fee or Expense Reimbursement 83% (75% in US Study) 27
Public M&A Key Deal Terms Deal Protections Target Break Fees - No-Vote Plus Acquisition Proposal No "No-Vote" + Acquisition Proposal Fee 4% (13% in US Study) Includes "No-Vote" + Acquisition Proposal Fee 96% (87% in US Study) 28
Public M&A Key Deal Terms Deal Protections Target Break Fees - Drop Dead Date Plus Acquisition Proposal Includes Drop Dead Date + Acquisition Proposal Fee 37% (77% in US Study) No Drop Dead Date + Acquisition Proposal Fee 63% (23% in US Study) 29
Public M&A Key Deal Terms Deal Protections Target Break Fees - Breaches General Breach No Fee 35% (95% in US Study) Includes Fee 65% (5% in US Study) 30
Public M&A Key Deal Terms Deal Protections Target Break Fees - Change in Board Recommendation Includes Fee** 99% No Fee 1% 31
Public M&A Key Deal Terms Deal Protections Target Break Fee As a percentage of Deal Size Change in Board Recommendation Fee < 1% 3% 3 Transactions Fee between 1% and 2% 8% 7 Transactions Fee between 2 % and 3% Fee between 3% and 4% 32% 28 Transactions 37% 32 Transactions Fee between 4% and 5% 15% 13 Transactions Fee > 5% 5% 4 Transactions 32
Public M&A Key Deal Terms Deal Protections Reverse Break Fees General Breach Failure to Obtain Financing Regulatory Condition Failure Includes Fee 35% (9% in US Study) Includes Fee 56% (7% in US Study) Includes Fee 19% Does Not Include Fee 65% (91% in US Study) No Fee 44% (93% in US Study) No Fee 81% 33
Public M&A Key Deal Terms Deal Protections Reverse Break Fee Size Compared to Target Break Fee RBF for General Breach (31 deals) RBF for Financing Failure (10 deals) Same 58% (18 deals) RBF Higher 13% (4 deals) RBF Lower 29% (9 deals) RBF for Regulatory Failure (17deals) RBF Higher 18% (17 deals) Same 60% (6 deals) RBF Higher 20% (2 deals) RBF Lower 20% (2 deals) Same 53% (9 deals) RBF Lower 29% (5 deals) 34
Public M&A Key Deal Terms Confidentiality/Standstills Use restrictions as backdoor standstills RIM v. Certicom Gold Reserve v. Rusoro Mining Keeping a clean team Obligations to allow due diligence Osisko/Goldcorp 35
Public M&A Key Deal Terms Confidentiality/Standstills Springs In what circumstances should the recipient of confidential information be released from the standstill? Hostile versus friendly deal as a springing event Limited release to submit a confidential proposal 36
Public M&A Key Deal Terms Confidentiality/Standstills Teaming Controlling your white knight e.g. ArcelorMittal (WK) partnered with Nunavut Iron Ore (Hostile bidder) to jointly acquire Baffinland H&R REIT (WK) partnered with Kingsett (Hostile) to jointly acquire Primaris REIT 37
Cam Rusaw Alex Moore 416-863-5555 416-863-5570 crusaw@dwpv.com amoore@dwpv.com