From PLI S Course Handbook s2

From PLI’s Course Handbook

Mergers & Acquisitions 2008: Trends and Developments

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negotiating the purchase

agreement

Richard A. Goldberg

Lisa E. Pell

Dechert LLP

This outline is current through November 20, 2007. Mr. Goldberg is a partner of, and Ms. Pell is an associate of, the firm of Dechert LLP. Portions of this outline have been, or may be, used in other materials published by the authors or their colleagues.

RICHARD A. GOLDBERG +1 212 649 8740

Partner

Dechert LLP

Richard A. Goldberg is a partner in the corporate and securities group. He focuses his practice on mergers and acquisitions as well as corporate finance. He has advised private and public companies, as well as investment banking firms, and represents numerous public companies on an ongoing basis. He has regularly advised corporate boards and special committees regarding governance and fiduciary duties.

He has counseled on a wide range of transactions, including proxy contests, hostile and friendly tender offers, self-tenders, joint ventures, going private transactions, spin-offs, acquisitions of entities under Chapter 11 protection, and other forms of corporate restructurings.

Notable transactions that Mr. Goldberg has recently handled include:

--Representation of The Lightstone Group and Arbor Realty Trust in their $8 billion acquisition of Extended Stay Hotels from The Blackstone Group. –

--Representation of BAWAG P.S.K. Bank on US matters in connection with its $4.2 billion) sale to Cerberus Capital.

--Representation of Goody's Family Clothing (Nasdaq:GDYS) in its $300 million sale to Prentice Capital and GMM Capital Management.

--Representation of Cantor Fitzgerald and eSpeed, Inc (NASDAQ: ESPD) in connection with their formation of a joint venture with Williams Energy, Coral Energy, Dominion Energy, Axia Energy, TXU Energy and Dynegy.

--Representation of Angelo Gordon and Eureka Capital in their $75 million acquisition of National Home Health Care (NASDAQ: NHHC).

--Representation of principal shareholder in connection with the sale of ILC Industries, a leading defense industry manufacturer to Berman Capital.

Publications and Lectures

Mr. Goldberg is widely published and frequently lectures on topics involving mergers and acquisitions and federal securities laws.

Education

Vermont Law School, J.D., cum laude, 1978, editor of the Vermont Law Review and member of the National Moot Court Team

Queens College of the City University of New York, B.A., 1974

NEGOTIATING THE PURCHASE AGREEMENT

Richard A. Goldberg
Lisa E. Pell

Lisa E. Pell

Table of Contents

(continued)

Page

I. INTRODUCTION 1

A. Function of the acquisition agreement 1

B. Main components 1

1. Representations and warranties 1

2. Covenants 2

3. Conditions 2

4. Indemnification 2

C. Simultaneous versus delayed closing 3

1. Purposes of a delayed closing 3

a. Possible consequences of a delayed closing 3

2. Effects on the agreement 4

3. Disclosure 5

II. REPRESENTATIONS AND WARRANTIES 5

A. Seller’s representations 5

B. Buyer’s representations 6

C. Specific seller representations 6

1. Financial statements 6

2. Assets and liabilities 7

a. Accounts receivable 7

b. Inventory 8

c. Plant and equipment 8

d. Liabilities 9

e. Taxes 9

3. Leases, contracts and other commitments 10

4. Customers and suppliers 10

5. Employee matters 10

6. Patents, trademarks, copyrights, trade names, etc 11

7. Litigation and compliance with law 11

8. Absence of certain changes 11

9. Insurance 11

10. Environmental protection 12

11. Data Backup and Redundancy 13

12. Regulation FD 13

13. Sarbanes-Oxley 13

14. Catch-all representations 19

D. Schedules 20

E. Prompt filing requirements for acquisition agreements 20

F. Limitations on representations and warranties 20

1. Materiality qualification 20

2. Double materiality 21

3. Knowledge qualification 22

a. The meaning of knowledge 22

G. Incorporation of SEC filings into representations and warranties 23

III. COVENANTS 23

A. General 23

B. Covenants pending the closing 24

1. Best efforts qualification 24

2. Stringency of certain covenants 24

3. Examples of specific covenants 25

a. Affirmative: 25

b. Negative: 25

C. Covenants effective after the closing 26

1. Contingent pay outs; earn outs 26

D. Specific covenants; effects of termination: no shops, options and break-up fees 27

1. No shop provisions 28

2. Force the vote provisions 29

3. Matching/Topping Rights 30

4. Stock or asset options 30

a. Stock options 30

b. Asset options 31

5. Expense reimbursement or break-up fees 32

6. Shareholder Voting/Option Agreements 32

7. Legality 32

a. No shop provisions 33

b. Options 33

c. Break-up fees 33

8. Deal Poaching 35

9. Legal Effect of Deal Protection Devices 36

a. Deal Protection Spectrum 38

IV. CONDITIONS 39

A. General 39

B. Material Adverse Effect/Change 40

C. Standards of compliance with conditions 44

D. Effect of failure of certain conditions 44

E. Under certain circumstances (e.g 44

F. Examples of specific conditions 46

1. that the representations and warranties are true at the closing and all of the pre-closing agreements of the parties have been performed; 46

2. that all necessary approvals from regulatory authorities have been obtained; 46

3. receipt of tax rulings; 46

4. delivery of certain financial statements; and 46

5. delivery of legal opinions (discussed more fully below) 46

G. Legal opinions 46

1. Purpose 46

2. Who can rely on the opinion 46

3. Opinion giver 46

4. Contents of opinion 47

a. Incorporation and good standing 47

b. Qualification 47

c. Enforceable in accordance with its terms 48

d. Consents 48

5. Transaction specific matters 48

6. Factual matters 49

7. Multiple jurisdictions 49

8. No Litigation Opinions 50

V. INDEMNIFICATION 51

A. General 51

1. Who should be the indemnitors? 51

2. Scope of the indemnity 53

a. Substantive elements 53

b. Fees and expenses 53

c. Third party claims 54

3. Who may be indemnified? 54

4. The amount of indemnification 55

B. Limitations on indemnification 55

1. The “basket” 55

a. Threshold 55

b. Deductible 55

c. Specific concerns 56

2. Survival 56

3. Caps on amount of indemnification 57

4. Defense of actual knowledge of buyer before the closing 57

C. Arbitration clauses 58

-iv-

exhibit index

Exhibit / Description
A / Acquisition of a company owned by an individual by an investor group.
B / Merger Agreement by and among Goody’s Family Clothing, GF Foods and GF Acquisition Corp. – two steps consisting of a tender offer followed by a merger This was a second round merger agreement entered after a topping bid had been received.
C / Fair merger agreement; not heavily negotiated.
D / Stock for stock merger agreement by and among Hewlett-Packard Company, Heloise Merger Corporation and Compaq Computer Corporation.
E / Heavily negotiated stock purchase agreement by and among Harrah’s Entertainment, Inc. and Horseshoe Gaming Holding Corporation.
F / Cash merger agreement among AT & T Wireless and Cingular Wireless et. al.
G / Asset purchase agreement among CVS Pharmacy, Inc., J.C. Penny Company, Inc., et. al.
H / Amended and Restated Agreement and Plan of Merger by and among National Home Healthcare Corp., AG Home Health Acquisition Corp. and AG Home Health LLC – negotiated cash merger agreement in the healthcare industry.

I. INTRODUCTION.

A. Function of the acquisition agreement. In addition to setting forth the principal financial terms of a transaction, the acquisition agreement also sets forth the legal rights and obligations of the parties with respect to the transaction. It provides the buyer with a detailed description of the business being acquired and affords the buyer remedies where the description proves to be materially inaccurate. The agreement indicates the actions which must be taken by the parties to properly consummate the transaction and requires the parties to take these actions. Finally, the acquisition agreement allocates the risks associated with the purchased business among the parties to the agreement. Special consideration may be applicable to the structuring of an acquisition and/or sale of divisions and subsidiaries. Certain legal issues are unique to these divestiture transactions, and may require particular attention, such as: fiduciary issues, financials; shared assets and liabilities; antitrust issues, taxes and employee matters.[1]

B. Main components. The objectives of the purchase agreement are accomplished through the operation of the representations and warranties, covenants, conditions and indemnification provisions.

1. Representations and warranties. The primary function of the representations and warranties is to provide the buyer with a “snapshot” of the acquired business at a particular point in time, typically on the date the agreement is signed and again on the date of the closing.

2. Covenants. The covenants govern the relationship of the parties over a certain time period. Certain covenants apply from the signing of the agreement until the closing date and provide assurance that the proper actions are taken to facilitate the closing of the transaction and preserve the business pending the closing. Other covenants survive the closing for a certain length of time, such as covenants requiring cooperation of the parties with respect to the post-closing transition of the business or sharing of facilities.

3. Conditions. Acquisition agreements contain conditions precedent that must be met in order for the party receiving the benefit of the condition to be legally obligated to consummate the transaction. If one party fails to satisfy a condition by the date of the closing, the other party has the right to terminate the agreement and walk away from the transaction.

4. Indemnification. The indemnification portion of the agreement requires the parties to pay damages in the event of a breach of their respective representations, warranties and covenants. Indemnification provisions also serve to allocate specific post-closing risks associated with the transferred business.

C. Simultaneous versus delayed closing.

1. Purposes of a delayed closing. In most instances, the parties would prefer to sign the agreement and close without any delay. However, it is often necessary to delay the closing to provide time to obtain third party and/or governmental consents which are required to consummate the transaction or to facilitate the financing of the transaction. For example, transactions exceeding a certain size require the approval of the Federal Trade Commission, and others necessitate filings with the Securities and Exchange Commission (“SEC”), e.g., where securities of the purchaser are issued as consideration for the transaction in a manner which constitutes a public offering. In addition, the seller and possibly the buyer may need to obtain shareholder consent to the transaction. In such an event, if the seller or the buyer, as the case may be, is a public reporting company, subject to the SEC’s proxy rules, an SEC filing would also be required. The two-part signing and closing allows the parties to reach an agreement as early as possible and attend to these matters after the agreement is signed.

a. Possible consequences of a delayed closing. The Delaware Supreme Court held, that in a two step merger, the value added to the business being acquired following a change in majority control and during the transition period “accrues to the benefit of all shareholders and must be included in the appraisal process on the date of the merger.”[2] Accordingly, when a buyer is considering a two step acquisition, the buyer should consider the possibility that dissenting shareholders who do not sell their shares in the first step of an acquisition may be entitled to their pro rata share of the value added to the business being acquired by the buyer during the transition period, thereby forcing the buyer to pay a higher price to such shareholders at the second step of the acquisition than the original price paid.

2. Effects on the agreement. Acquisition agreements involving a simultaneous signing and closing are much simpler than those involving delayed closings. The reason for this is that the covenants which govern between the signing and the closing and the conditions to closing may be eliminated. For example, no shop provisions, options and break-up fees are only necessary in the event of a delayed closing (see section IIIC “Specific covenants; effects of termination: no shops, options and break-up fees” below). Other than the principal financial terms, only the representations and warranties, the related indemnification provisions and the post closing covenants need to be included in the Agreement.

3. Disclosure. During the period between the signing and the closing, the buyer is typically given full access to the seller’s books, records and other pertinent data. Prior to the signing, the buyer’s access will be less extensive because of the seller’s reluctance to provide certain information in the absence of a signed agreement.

II. REPRESENTATIONS AND WARRANTIES.

A. Seller’s representations. The seller’s representations and warranties serve various purposes from the buyer’s perspective. First, the buyer seeks assurance that the seller has the authority and power to enter into the transaction, and that once the buyer pays the consideration, it will own the business being acquired. Second, the representations serve as a means to acquire information from the seller regarding the nature and value of the business. Representations force the seller to carefully consider and disclose material that may not otherwise be discoverable by the buyer through due diligence. In addition, through the operation of the conditions to closing, the representations provide the buyer with the right to terminate the agreement in the event that any of the representations prove to be false at the time of the closing. The representations also provide the groundwork for indemnification after the closing.

B. Buyer’s representations. The seller will also want to obtain representations to the effect that the transaction is properly authorized and is binding on the buyer. Aside from these, the form of payment will govern the extent of any other representations and warranties that the seller will require from the buyer.