Key Provisions in M&A Agreements (Series: Private Company M&A Boot Camp)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Robert Londin – Jaspan Schlesinger LLP
Panelists:
Mark O'Brien – Chicago M & A Advisors, Inc.
Aarthi Belani – Jones Day
Jacqueline Brooks – Saul Ewing Arnstein & Lehr
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ABOUT THIS WEBINAR: Key
Provisions in M&A Agreements
Although every deal is different, understanding any purchase/sale agreement will help you
understand other purchase/sale agreements. Stated another way, most M&A documents
include a similar set of sections and use a similar vocabulary. This episode explains specific,
common provisions and discusses how buyers and sellers approach these provisions
differently, particularly in light of structure differences (e.g., whether the company or its assets
are being acquired). Topics covered will include tax issues; corporate governance; closing
conditions; representations and warranties; indemnification provisions; earn-outs; restrictive
covenants; antitrust; intellectual property; and employment issues.
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ABOUT THIS SERIES: Private Company M&A
Boot Camp
Corporate transactions (or “deals”) include many types of transactions. Viewed broadly, a deal can be a very small
matter such as drafting a purchase order, a non-compete agreement, or myriad other single-purpose agreements
necessary to document a legal relationship between two parties, and extend to large multi-national acquisitions and
financings. One of the most significant types of transactions a company can enter into, however, and the type that is
commonly thought of as needing a “deal” lawyer, is a Mergers and Acquisitions transaction. M&A, viewed broadly,
includes buying or selling all or part of a business or company, as well as business combinations, such as mergers. Such
“deal” work commonly requires attorneys, accountants, and bankers to work together with the counterparties. This
2019 PRIVATE COMPANY M & A BOOT CAMP webinar series features leading M&A attorneys and other deal
professionals speaking about private company M&A in roughly chronological order, guiding the audience through a
conversation that spans from deal origination, the LOI (letter of intent) or term sheet, due diligence, document
drafting and negotiation, closing, and post-closing. Issues addressed include tax planning and structure; corporate
governance; negotiating deal points and common pitfalls and challenges; closing conditions; representations and
warranties; indemnification provisions; earn-outs; restrictive covenants; antitrust; intellectual property; and
employment. While many of the topics covered apply also to public company M&A, the focus of this webinar series is
on M&A involving a privately-owned company or business.
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EPISODES IN THIS SERIES
8/6/19 Episode #1: Structuring and Planning the M&A Transaction
9/10/19 Episode #2: Key Provisions in M&A Agreements
10/15/19 Episode #3: The M&A Process
11/12/19 Episode #4: Post-Closing Issues
12/10/19 Episode #5: Negotiating an M&A Deal
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
Key Provisions in M&A Agreements
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OUTLINE
• Purchase Price
• Representations and Warranties
• Post-Closing Covenants
• Closing Conditions
• Restrictive Covenants
• Indemnification
• Choice of Law/Venue/Dispute Resolution/Boilerplate
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A COUPLE OF QUICK CAVEATS
•Key provisions will vary from transaction to transaction. What we will be
discussing today is not meant to be an exhaustive list, rather a survey of
provisions of general importance to both parties.
•There are important distinctions between stock transactions, asset purchases,
and mergers (and among different types of mergers). You should assume, though,
for purposes of our presentation today, that our conversation will apply to all of
these types of transactions unless otherwise stated.
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PURCHASE PRICE GENERALLY
• How is it calculated?
• How much are sellers getting at closing vs. what’s deferred?
• What’s the risk in what’s deferred?
• Cash vs. stock
• Capital gains vs. ordinary income (allocation)
• Is all stock/are all assets of selling company being sold?
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CALCULATION OF PURCHASE PRICE
• For privately-held companies, purchase price is most often calculated as a multiple of
EBIT (Earnings before interest and tax) or cash flow; the multiple will vary based on
many factors but most importantly the industry and the status of the business cycle.
• Some businesses are valued based on book value, and a variety of metrics are used for
businesses which are pre-profit or even pre-sales.
• Sellers who are independently approached by potential buyers should strongly
consider hiring a valuation consultant/financial advisor to ensure the fairness of the
offer they are considering and to negotiate/shop their businesses.
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PURCHASE PRICE AT CLOSING VS.
FUTURE PAYMENTS (THE “WHEN”)
• General rule for sellers in a cash transaction: get as much as soon as you can.
• Depending on interest rate, if any, in note, Sellers lose time value of money.
• However, spreading out payments over multiple tax years may help sellers
arbitrage tax liability.
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PAYMENTS OF PURCHASE PRICE
SUBSEQUENT TO THE CLOSING (THE “IF”)
• Sellers can’t be sure of Buyer’s post-closing economic condition, and if Sellers are
unsecured creditors (see below), other parties might have superior rights to payments.
• Sellers cannot closely monitor buyer’s operations post-closing and cannot ensure
payments will be made to them, even if Buyer is able to do so.
• Seller protections:
✓ Security
✓ Guaranty
✓ Letter of credit
• Convertibility of note
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CASH VERSUS STOCK
• Buyers often seek to pay Sellers in stock of the buying company.
• This can be a plus for Sellers in that it could be a tax-free transaction (unless and until
the stock in buyer is actually sold) if meeting certain statutory requirements. The stock
also offers the possibility of appreciation.
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CAPITAL GAINS VS. ORDINARY
INCOME TAX CONSEQUENCES
• Buyers will typically want Sellers, particularly those who have had an active role in
running the business prior to the closing, to both continue with the business in some
role and to refrain from competing with it after the transaction closes (see slides on
post-closing covenants).
• The money paid to Sellers for employment/consulting and non-competition will be
taxed at ordinary income tax rates (as opposed to money paid for stock in a stock
purchase and certain assets in an asset purchase).
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CAPITAL GAINS VS. ORDINARY
INCOME TAX CONSEQUENCES (cont'd)
• Payments for physical assets such as inventory and equipment in an asset sale will also
be taxed at ordinary income tax rates.
• It may be advantageous for Sellers to receive less on the top line if they can receive
capital gains tax treatment for a higher percentage of the consideration they receive.
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RECAPITALIZATIONS AND
REORGANIZATIONS
• Some buyers, particularly financial buyers like private equity firms, prefer to buy less
than 100% of the stock of a target company, desiring to retain existing management
with an equity stake in the company; many times a buyer will buy target’s equity in two
stages.
• In some of these instances, a buyer will come in as a preferred stockholder with
enhanced rights and protections.
• In a best case scenario, existing management will remain incentivized and have more
resources to grow the business as it moves forward.
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THE THREE PRACTICAL
CONSIDERATIONS OF
REPRESENTATIONS AND WARRANTIES
Due Diligence Aid, The Bringdown, and Indemnity/Purchase Price
Adjustment
• Due Diligence Aid
✓ Helps Buyer;
✓ Helps Buyer and Seller confirm purchase price.
• The Bringdown- “Are we good to close?”
• Basis for Indemnification
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TYPES OF REPRESENTATIONS AND
WARRANTIES
• Transaction Generally (good standing, capacity, authorization, enforceability, no
conflicts, etc.)
• More Seller/Target Specific (but not industry specific) - litigation, financial
statements, taxes, ERISA, labor matters . . . types of generic representations and
warranties that apply to virtually any Target
• Industry Specific - Licenses, Permits, Regulatory, etc.
• Target Specific - material contracts, Top 20 suppliers, Top 20 customers (raises
disclosure concern; NDA)
• The Catchall; 10b-5.
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OTHER CONSIDERATIONS
• Who makes the representations and warranties (tie to indemnity)?
• Joint and Several
✓ Tied to indemnity
✓ If deal falls apart after signing (recourse)
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OTHER CONSIDERATIONS:
KNOWLEDGE QUALIFIER (cont'd)
• Actual Knowledge
• Implied/imputed knowledge
• Due inquiry prong
• Entity’s “Knowledge” relative to that of its management team or senior
executives.
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MATERIALITY QUALIFIER?
• Quantify?
• MAC Relationship
• Recent Delaware case law regarding materiality/MAC
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INDEMNIFICATION
• The indemnification provisions are most typically how buyer is compensated
for damages it suffers, most often from Sellers’ breaches of the representations.
• One of the most intensely negotiated parts of a M&A agreement.
• Key issues are limitations (time, dollar amounts), process and scope
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SURVIVAL (TIME LIMITS) OF
REPRESENTATIONS AND WARRANTIES
• Most typically 1-2 years; completion of audit cycle
• Statute of limitations [plus three months] for certain representations and warranties
• In perpetuity for core representations and warranties regarding ability to enter into the
acquisition agreement and enforceability
• Survival tail added (for period during which there may be disputes)
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BASKETS AND CAPS (DOLLAR LIMITS)
• Basket/Threshold (Amount % & Types)
– Tipping
–Non-Tipping (Pure Deductible)
–Split Basket
–“Non-Basket Losses”
• Indemnity Cap
–Customary percentages
–“Non Cap Losses”
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INDEMNITY MECHANICS
• Holdback
• Escrow (always better to be the party holding the money)
• Holdback Note (offset)
• Offset against Earn-out (if applicable)
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MISCELLANOUS ISSUES
• Joint and several liability
• Role of insurance, tax and other recoveries
• Exclusivity of remedy
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ABOUT THE FACULTY
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Robert Londin – rlondin@jaspanllp.com
A partner in his firm’s Corporate and Commercial Transactions Group, Mr. Londin counsels
numerous companies in connection with their mergers and acquisitions (both strategic and
financial), financing needs and the execution of their business plans; financial concerns in capital
markets transactions; emerging-growth companies; seed and venture capital clients in connection
with the formation of their investment vehicles and making of their portfolio company investments;
borrowers and lenders in secured financings; and companies and highly compensated executives in
connection with their compensation and separation arrangements.
Rob serves as general counsel to many clients and their senior executives and advisory boards. This
general corporate representation covers day-to-day legal issues as well as strategic planning and
business development extending to acquisition and financing concerns. He also represents
technology and emerging-growth clients in connection with their strategic alliances, technology
licensing, mergers and acquisitions, corporate finance, venture capital, banking transactions and
general corporate needs.
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Mark O'Brien – mark@chicagomaa.com
Chicago M&A Advisors - M&A focused investment bank that executes mergers, acquisitions, &
growth capital for privately held & family businesses between $10M and $100M. Deal experience is
across manufacturing, distribution, technology, consulting services, dealers, and contractors. Target
markets are strategic businesses, private equity groups, and family offices.
Hands-on owner and M&A experience, was 3rd generation manufacturing business owner.
Experienced corporate M&A executive, lead acquisitions for a privately held industrial distributor
executing multiple deals to gain market share, expand product lines and add resources. Mark spent
several years in management consulting working directly with small business owners defining vision
and strategic redirections developing & implementing business growth and transition plans.
Mark is a mentor & consultant through the Score Chicago branch of SBA. Chairman - Society of
Manufacturing Engineers - Chicago. Board - Legacy Reentry Foundation assisting formally
incarcerated. Member of Alliance of Merger and Acquisition Advisors - Certified M&A Advisor
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Aarthi Belani – abelani@jonesday.com
Aarthi Belani is a partner in the M&A practice in the Silicon Valley office of Jones Day. She focuses
on M&A and venture deals in tech and life sciences. Prior to joining Jones Day, Aarthi was on the in-
house legal team covering strategy and corporate development at Credit Suisse in New York. Aarthi
was an associate in the New York office of Cleary Gottlieb Steen & Hamilton for the first five years of
her private practice career, prior to which she was a Junior Fellow at the Institute for International
Law and Justice at NYU School of Law, where she attended law school. She is a Leadership
Committee member of How Women Lead, a nonprofit that is part of the 2020 Women on Boards
campaign to increase the representation of women on corporate boards, and a director of Bidoun, a
not-for-profit publishing, curatorial, and educational initiative that prints a quarterly magazine
showcasing art and culture from South Asia and the Middle East. She also has been a director of
Keep a Child Alive, a pediatric AIDS nonprofit. Aarthi attended Stanford University as an
undergraduate.
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Jacqueline Brooks – jacqueline.brooks@saul.com
Jacqueline Allen Brooks concentrates her practice in general business and commercial law. She
counsels clients in mergers and acquisitions, purchases and sales of businesses, commercial finance,
private offerings of debt and equity securities, and life science transactions, and shareholder
derivative matters, including shareholder demand responses and special committee issues.
Jacqueline has experience representing public companies, privately owned and managed
companies, nonprofit organizations and start-up companies and provides general counsel to these
organizations regarding corporate matters. Prior to joining Saul Ewing Arnstein & Lehr, Jacqueline
participated in Washington University School of Law’s D.C. Clinic, through which she was an intern
to the United States House Judiciary Committee. In this capacity, she drafted legal memoranda to
assist Congressman John Conyers, Jr. and the Congressman’s legislative assistants at Judiciary
Committee hearings and briefings.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/jacqueline-
brooks/
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
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Key Provisions in M&A Agreements (Series: Private Company M&A Boot Camp)

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