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

STRUCTURE AND PROCESS IN

M&A TRANSACTIONS

Basic Deal Structures

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• Asset Purchase

• Stock Purchase

• Merger

Structure Drivers

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• Tax

• Liability avoidance

• Target contracts

• Target stockholder base

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

$$

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)

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

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

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

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)

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

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

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

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

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)

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

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

Due Diligence – Certain Items

• Outstanding indebtedness

• Financial valuations

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

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)

Ancillary Agreements (continued)

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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

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

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

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