m&a transition services agreements -...

M&A Transition Services Agreements Negotiating and Drafting Key Terms to Preserve Business Value and Mitigate Risk

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THURSDAY, AUGUST 9, 2012

Presenting a live 90-minute webinar with interactive Q&A

Mark D. Williamson, Principal, Gray Plant Mooty, Minneapolis

B. Scott Burton, Partner, Sutherland Asbill & Brennan, Atlanta

Andrew Diaz-Matos, Assistant Vice President, Senior Counsel, The Hartford, Hartford, Conn.

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©2010 Sutherland Asbill & Brennan LLP

Transition Services Arrangements:

Strategies for Sellers and Buyers

August 9, 2012

B. Scott Burton Mark D. Williamson

17845668.4

Andrew Diaz-Matos

The Hartford


Introduction

This Presentation will:

• Provide an overview of the scenarios which give rise

to transition services agreements (TSAs)

• Identify the customary characteristics of transition

services agreements

• Introduce select legal and business issues commonly

encountered when negotiating transition services

agreements

1


Overview

• What is a Transition Services Agreement?

A temporary outsourcing or shared service arrangement

Between related or formerly related entities, or between buyer and seller

Limited duration

To provide continuity in operations:

While sold business is being transferred to buyer

While newly independent company establishes its own capabilities/sources

Addresses continuing and/or unfinished service obligations between the parties

At arm’s length

At agreed prices

2


Overview

• Common scenarios in which transition service

agreements arise

Divestiture

Spin-Off (Section 355)

Split-Offs (Section 355)

Acquisition/Sale/Purchase

• Nature and scope of services will depend on type of

transaction

3


Overview

• Types of Services Typically Covered by a TSA

Information technology services/processing services

Back office support services (e.g., collections, billing)

Insurance administration/claims handling processing

Facilities management

Human resources (e.g., employees, benefits, payroll)

Manufacturing

Procurement/purchasing

Warehousing/distribution

4


Principal Business Considerations

• Services Provided

Description of services/statement of work/scope

What’s delivered?

How delivered?

When delivered?

Data needed to perform

Third party providers of services/changes in third party

providers

Ability to subcontract

Service recipient obligations

Reporting

Any reverse services required?

5



• Term

End date

Extension of term (unilateral right or mutual agreement)

• Performance Standards/Service Levels (SLAs)

Metrics/standards applicable to performance (historical

performance, best efforts, others?)

Measurement regime/computations

Financial impacts (possible “credits” for deficient

performance)

6



• Price

Flat fee for all services; per service fee?

Basis for price:

Cost-based (disclosure of costs incurred)

Fair market value

No charges

Out-of-pocket/pass through

Adjustments to price

• Payment Terms

Frequency

Accounting

Audit right?

Interest for late payment?

7


Principal Legal Issues

• Representations and warranties

• Liability for contract defaults

• Cap/Limits on liability

Note relation to principal documents

Exclusion of certain damages

Offset right?

• Possible exclusions from limitations:

Breach of confidentiality

Intentional refusal to perform

Indemnification obligations

• Dispute resolution

8


Principal Legal Issues

• Possible Indemnities

Infringement

Claims resulting from a breach of confidentiality obligations

Claims resulting from a breach of the TSA’s intellectual

property provisions

Claims resulting from supplier’s intentional refusal to

perform

Claims by third-party providers arising out of a breach of

third party contracts

Claims for increase in fees payable to third party providers

• Note relation to principal documents

9


Practical Considerations

• Smooth transition to independence often more important than maintaining higher-than necessary service levels

Value of the underlying transaction depends on a quick and smooth transaction

Generally, transition services are a burden on both buyer and seller

Often best to allow entities to separate quickly, to focus on their own operations rather than the transition

• Consider ultimate exit strategy post transition services

For any given operation, what is buyer’s post transition plan (e.g., outsource, retain in-house, reduce, eliminate)?

If the buyer plans to keep the operation in-house, buyer should be more involved during the transition stage

10



• Provide specific guidelines regarding the terms,

including timeline, cost, and services to be performed

Should understand costs and cost drivers related to the

services

Reduces likelihood of disagreement or delay during the

transition

Parties should be prepared to include performance metrics

Simply stating that transition services should be

performed at “existing service levels” may not be

sufficient, especially when seller does not currently

measure such standards

11



• Clear guidelines in the TSA are vital to preserve value of the underlying transaction

• TSAs should provide a common understanding of the terms it uses (e.g., what each service means)

Often specific services to be performed contained in exhibit to TSA

TSAs should note related services that are not included

• Create a master service agreement that effectively contemplates all services to be performed

• Transition services agreements often encompass a wide range of operations (e.g., IT, HR, finance & accounting, etc.), and the services of each operation collaborate to ensure a smooth transition

12



• Consider competing interests

Acquirer – heightened interest in more robust transition

services from seller

Will focus on scope of services, service levels, lowest

cost

Seller – desires to transfer all aspects of divested business

to acquirer as quickly as possible with minimal ongoing

commitments

Will be interested in short term agreement, narrow

scope, little or no service level commitments

13


A Case Study

• A corporation (“Parent Corp”) decides to sell one of its operating divisions to a third party (“Buyer”):

Buyer will require services or goods from Buyer post-closing

Parent Corp will also continue to provide certain back-office services to Buyer post-closing

Services must be provided until Buyer can hire sufficient employees to itself perform these services

Services will be documented in a transition services agreement

• Assumptions: All real intellectual property, tax, asset transfer and employment/employee related matters are handled in documents other than the TSA (e.g., Distribution Agreements, Technology Licensing/Intellectual Property Agreements, etc.)

14


A Case Study

• Misalignment of Interests:

Parent Corp may no longer want to be in Buyer’s business space

Parent Corp may therefore want to provide as few services and for as short a duration as possible

Parent Corp is likely not experienced in, or in the business of, providing support services to unrelated third parties and does not want to be held liable as if it were

Parent Corp may find it difficult to price services that are a part of its day-to-day operations

Buyer wants as much support from Parent Corp as possible in order to prevent interruptions or stoppages

Buyer may be entering into its own relationship with the various third party providers

15


A Case Study

• Business Objectives:

Buyer desires operational stability through transition

period/ramp-up

Both corporations seek to decouple/true separation

Buyer desires price/overhead stability

Parent Corp desires limited liability/investment

• Business Challenges:

Independence

New cultural considerations

New strategic objectives

16


Speaker Information

17

Mark D. Williamson, Principal, Gray Plant Mooty, Minneapolis, MN

Mark practices in the areas of business, corporate, and securities law, with a focus on mergers and acquisitions. He serves as Co-Chair of the firm’s Mergers & Acquisition Team. He has experience representing both public and private companies and private equity funds in various corporate transactions, including mergers, acquisitions, public and private offerings, tender offers, and debt financings.

[email protected]

Andrew Diaz-Matos, Assistant Vice President, Senior Counsel, The Hartford, Hartford, CT

Andrew is a transactional attorney currently focusing on technology and licensing matters with extensive experience in mergers and acquisitions. His areas of expertise include mergers and acquisitions, private equity, technology licensing, outsourcing, procurement, intellectual property, securities law, and bank finance.

[email protected]

B. Scott Burton, Partner, Sutherland Asbill & Brennan LLP, Atlanta, GA

Scott focuses on corporate mergers and acquisitions, corporate finance and securities, and general corporate and securities matters. He heads the firm’s Financial Services Industry Transactional Practice Group. His experience includes representing buyers and sellers in acquisitions and dispositions of private and publicly held life and property and casualty insurance companies, blocks of insurance business, broker-dealers and investment advisers.

[email protected]

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