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NUTS AND
BOLTS OF A
U.S. M&A
TRANSACTION
Prepared and Presented by Meredith W. Cook
Global Head, Legal M&A
December 6, 2016
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STRUCTURE AND PROCESS IN
M&A TRANSACTIONS
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Basic Deal Structures
12/1/2016 Title of the presentation 3
• Asset Purchase
• Stock Purchase
• Merger
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Structure Drivers
12/1/2016 Title of the presentation 4
• Tax
• Liability avoidance
• Target contracts
• Target stockholder base
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Asset Purchase
• Buyer only purchases the tangible and intangible assets and only
assumes the liabilities specifically identified in the purchase
agreement
Seller/Target Buyer
Certain Assets
+ Liabilities
$$
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Asset Purchase (cont.)
• Often preferred where Buyer is acquiring a single division or
business unit within a company
• Buyer will often prefer asset purchase as it allows for clear
delineation on what liabilities are assumed and which are excluded,
such as contingent or unknown liabilities
• Some liabilities cannot be avoided (e.g., environmental, successor
liability)
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Asset Purchase (cont.)
Disadvantages: o Usually more time-consuming and more diligence involved
o Non-transferability of some assets, such as permits and third party contracts
Tax considerations: o Asset purchases will typically afford Buyers a stepped-up basis in
the acquired assets which will facilitate favorable tax treatment in the form of depreciation
o 338(h) (10) election allows parties to have a stock purchase treated as an asset purchase for tax purposes
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Stock Purchase
• Buyer acquires target company’s stock from its shareholders
• Target company stays exactly the same (assets and liabilities
unchanged) but with new ownership
Parent/Seller
Target
Buyer Stock
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Stock Purchase (cont.)
Advantages to Buyer: • Less complicated
• Fewer issues with transferability of assets and third party consent (unless change of control restrictions)
Disadvantages to Buyer: • More difficult to limit liability
• Must acquire all assets
• If target has many shareholders, will need shareholder consents and may be left with minority shareholders
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Stock Purchase (cont.)
Advantages to Sellers
• All liabilities are assumed (unless indemnification)
• Generally less complicated
Tax Considerations
• One level of tax on selling stockholders (unless 338(h)(10)
election is made)
• One advantage of stock sale to buyers is the ability to use tax
loss carryforwards (subject to limitations)
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Mergers If a target company has a large numbers of shareholders, a stock
purchase may not be feasible
Types of Mergers Business combination is the simplest type of merger of two relatively equal companies where one party survives
Company A ceases to exist and all of its assets and liabilities merge with and into Company B, the surviving
company
Company A Company
B Merges
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Mergers (cont.)
Forward Triangular Merger – Buyer forms a new subsidiary which
merges into the Target company with the new subsidiary as the
surviving entity
Does not avoid assignability issues so not as common as a Reverse
Triangular Merger
Buyer
Merger
Sub Target
Merges
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Mergers (cont.)
Reverse Triangular Merger – Buyer forms a new subsidiary which merges into the target company with the target company as the surviving entity
• Avoids many assignability issues unless contracts restrict changes in control at shareholder level
• Both reverse merger forms allow Buyer to isolate liabilities into the merger subsidiary
• Meso Scale v. Roche Diagnostics (Del. Court of Chancery 2011)
Buyer
Merger
Sub Target Merges
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Consideration
Types of Consideration = cash, stock or some
combination • Cash is the most liquid and least risky method from Target/Seller
perspective
• Stock involves payment of Buyer’s equity issued to the target company’s
shareholders at a determined ratio relative to the target’s value
• Assumption of Seller Liabilities
• Contingent payments and earnouts are ways of deferring purchase
price and shifting risk to Seller/Target
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ANATOMY OF TRANSACTION: Preliminary Matters
Confidentiality Agreement
Financial Advisor Engagement Letter
Letter of Intent or Non-binding offer • Contains key financial terms and assumptions
• Subject to ongoing due diligence
• Typically non-binding, although some terms (such as confidentiality, lock up/exclusivity, expenses) may be binding
• Should include type/structure of transaction, price/form of consideration, key payment terms, key contingencies, earnest money deposits (if any)
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Due Diligence
• Need to understand the Company that will be sold and the impact of the
proposed transaction
• Due diligence is an ongoing process from the signing of a CDA through
signing of the definitive agreements
• Virtual dataroom and regular meetings to facilitate ongoing diligence requests
• Indemnification/other risk mitigation techniques should NOT be a substitute for
doing thorough due diligence
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Due Diligence – Certain Items
Some common diligence items include:
• Corporate Approvals Required
• Third Party Consents and Change of Control/Assignment Issues
• Regulatory Approvals
• Assumed Liabilities (environmental, litigation, other)
• Status of Intellectual Property
• Employment Matters (280G issues, ERISA, Benefit Plans)
• Real Property Matters
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Due Diligence – Certain Items
• Outstanding indebtedness
• Financial valuations
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Anti-Trust/Regulatory Issues
Generally, anti-trust laws seek to limit non-competitive and monopolistic behavior
Filings may be affirmative (i.e. requiring approvals prior to closing), negative (i.e., governmental
agency does not act to step or delay), or informational
Hart-Scott-Rodino is the most commonly required filing in U.S. M&A transactions
• Size of transaction threshold is currently $78.2 million
• Typically, a 30 day waiting period (or 15 for tender offers) although early termination may be requested
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Key Transaction Agreements
Acquisition Agreement
SPA
APA
Agreement and Plan of Merger
Ancillary Documents
Promissory Notes (if financing)
Security Agreements
Escrow Agreement (if indemnity or earnout/contingent escrow)
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Ancillary Agreements (continued)
12/1/2016 Title of the presentation 21
Bill of Sale
Assignment and Assumption Agreement
Non-competition and Employment Agreements
Officer’s and Secretary’s Certificates
Legal opinion from outside counsel
Transition Service Agreement
Exchange Agent Agreement
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Conditions to Closing
Certain events or conditions may need to occur between signing and
closing
HSR waiting period
Third party consents to transfers of contracts and permits
Financing
Notices to Employers
Notices to customers/suppliers
If none, then can have a simultaneous sign and close
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Closing
Once all conditions are met, the parties can close
At closing, all agreements are executed by the parties, certificates
are delivered, the parties confirm that all conditions are met and the
buyer pays the consideration that is due at closing to the seller
Consider timing issues if there is a complicated flow of payments
required at closing
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Post-Closing/Transition Period
Post-closing registrations of intellectual property
Real property title registrations
SAP/IT transition
Regulatory transitions
Manufacturing transition
Post-closing Working Capital/Inventory/Accounts Receivable Calculations and
Adjustment