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Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

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Thank You To Our Sponsors:

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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 that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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Meet the Faculty
MODERATOR:
Robert Londin – Jaspan Schlesinger LLP
PANELISTS:
Jacqueline A. Brooks – Saul Ewing Arnstein & Lehr LLP
Tim Ladin – MFP Investors LLC
Michael D. Weis – Firsel Ross & Weis
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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 situational differences (e.g. whether the assets being bought
and sold are equity of a company or the assets of a company; whether the seller is going to
cease to exists or not). 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 – M&A Boot Camp
This 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.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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Episodes in this Series
#1: Structuring and Planning the M&A Transaction
Premiere date: 8/25/22
#2: Key Provisions in M&A Agreements
Premiere date: 9/22/22
#3: The M&A Process
Premiere date: 10/27/22
#4: Post-Closing Issues: Integration & Potential Buyer/Seller Disputes
Premiere date: 11/17/22
#5: Negotiating an M&A Deal
Premiere date: 12/15/22
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Episode #2
Key Provisions in M&A Agreements
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Outline
• Purchase Price
• Representations and Warranties
• Closing Conditions
• Post-Closing Covenants
• 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?
• Escrows/Holdbacks
• Cash vs. stock
• Capital gains vs. ordinary income (allocation)
• Is all stock/are all assets of selling company being sold?
• Earnouts
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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. Standalone goodwill is also
considered in certain businesses.
• 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
(“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. If receiving
a note, Sellers should resist giving Buyers a right of offset against the note for indemnity
claims.
• However, spreading out payments over multiple tax years may help sellers arbitrage tax
liability.
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Payment Price Subsequent to the Closing (“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 vs. 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.
• If receiving stock from a publicly traded company, the seller should assess any
restrictions on transfer and when stock may be publicly sold. Seller should also
consider negotiating for registration rights in certain circumstances.
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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). Thus, Sellers should be mindful of
allocation of purchase price towards restrictive covenants.
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Capital Gains vs. Ordinary Income Tax Consequences
• 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.
• Owners of a target company selling assets may be susceptible to additional taxes on
the transaction from “built in gain” and/or “hot assets” because the asset sale could be
a deemed liquidation. As always, involvement of tax advisers is critical.
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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
• 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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Other Considerations: Materiality Quantifier
• 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 include limitations on indemnity claims like survival of representations and
warranties, baskets/thresholds/deductibles, indemnity cap, mitigation, insurance, tax
benefits, control of third party claims, and limitation of buy side remedies.
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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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Miscellaneous 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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About The Faculty
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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About The Faculty
Jacqueline A. 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 about Jacqueline, please visit:
https://www.financialpoise.com/financialpoisewebinars/faculty/jacqueline-brooks/
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About The Faculty
Tim Ladin - tladin@mfpllc.com
Tim is General Counsel, Vice President and Chief Compliance Officer of MFP Investors LLC,
an SEC registered investment advisor, and related entities of the family office of Michael F.
Price. In addition to the legal, compliance and operations of MFP, he manages a portfolio of
real estate, venture capital, private equity, and hedge fund investments. In this role he
regularly sits on boards of portfolio companies to advise on capital raising, governance and
M&A activity.
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About The Faculty
Michael D. Weis - mweis@firselross.com
Michael is a principal of Firsel Ross & Weis, representing privately and publicly held entities in business and
commercial transactions. He has handled the negotiation and closing of hundreds of complex corporate and
commercial real estate transactions both domestically and internationally. Michael's clients span a number of
industries including manufacturing, distribution, real estate, health care, food and beverage, technology, and
professional services. Armed with a wealth of knowledge and experience in corporate, real estate, and finance
matters, including being a Certified Public Accountant since 1985, Michael helps his clients succeed personally
and in business. His corporate experience includes all aspects of mergers and acquisitions, securities, and
corporate governance.
Michael's legal career spans three decades. He focuses on mergers and acquisitions, "Outside General
Counsel" representation, commercial finance, securities, real estate, tax and estate planning, and administration
matters. Prior to joining Firsel Ross & Weis, Michael's practice included 10 years at a boutique firm in Chicago
where he served as chair of the firm's business and transactional practice. Additionally, Michael was General
Counsel for a long-term care organization. He began his legal career with a Chicago-based corporate and
securities law firm, where he was an associate and then a partner.
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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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