m&a buyer protection beyond indemnification and...
TRANSCRIPT
M&A Buyer Protection Beyond
Indemnification and Escrows Structuring Deal-Specific and Often Overlooked Acquisition Provisions to Minimize Buyer's Risk
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THURSDAY, SEPTEMBER 19, 2013
Presenting a live 90-minute webinar with interactive Q&A
Melinda Davis Lux, Member, Wyche, Greenville, S.C.
Rita Barker, Member, Wyche, Greenville, S.C.
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M&A Buyer Protection Beyond Indemnification and Escrows
September 19, 2013
Rita Bolt Barker | Wyche 44 East Camperdown Way Greenville, SC 29601-3512 Phone: (864) 242-8235 [email protected] | www.wyche.com/rbarker
Melinda Davis Lux | Wyche 44 East Camperdown Way Greenville, SC 29601-3512 Phone: (864) 242-8223 [email protected] | www.wyche.com/mdavislux
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Most Common Deal Protections
• Robust due diligence
• Indemnification
• Escrows
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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
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Obstacles to Negotiating Deal-Specific Indemnification Protection
• M&A deal studies define “market” terms
• Reluctance to deviate from deal study “norms”
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Environmental Nuances to Definitions & Indemnification
• Clarify definitions impacting environmental issues
– “Environmental Laws”
– “Hazardous substances”
• Be creative in structuring indemnification obligations
– Sliding scale
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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.
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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?
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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?
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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.
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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?
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Pre-Closing Inventory Audit
Interplay with other purchase agreement provisions:
• Working capital adjustment
– Use inventory audit value • Inventory representations
– Seller’s audit certificate
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Tax Compliance Certificates
• Closing deliverables
• Inquire at state and local level
• Protection will vary
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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
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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
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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
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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
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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
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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.
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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.
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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
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Setoff Rights as a Deal Protection
Key Cases:
Centurion Air Cargo, Inc. v. United Parcel Service Co., 420 F.3d 1146 (11th Cir. 2005)
• Express setoff rights are enforceable
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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
DEI
Bichler and Beven
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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
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Cross-Default Provisions
Purchaser has the right to terminate a post-closing agreement if Seller fails to fulfill its indemnification obligations. • Include cross-default provisions in Seller-
favorable agreements
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