07 Nov 10 M&A Considerations (Part Two)
We have posted blogs recently about the importance of seeking expert help when undertaking M&A. It is also important to get a basic understanding of considerations that will be discussed and debated. You don’t want to head into the negotiations blind, this will add time and more importantly cost. This two-part blog covers 10 of the most common considerations that an expert will discuss with you. This post covers off considerations 6-10.
Indemnity is based on the contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. For this reason, indemnification provisions are always highly debated between buyers and sellers. So expect to spend a bit of time on these clauses. Common discussion points are what types of indemnification claims will be possible and at which amount. The claims are generally capped at the escrow amount. However, in cases where claims are the result of fraud and/or intentional misrepresentation, these usually go beyond the escrow and often instead capped at the overall purchase price. When preplanning, a way to avoid the irritation of disputes over small amounts, there is typically a minimum claim amount. Indemnity agreements will have a period of indemnity, a specific length of time in which the indemnity is valid.
Joint and several liabilities
This is related to the concept of indemnification mentioned about. Most merger or acquisition transactions involve numerous target stockholders. Joint and several liabilities are considerations that cover to what extent the target’s stockholders will be liable in the indemnification obligations post-deal. Make sure you discuss this with your partners; this can cause very costly legal battles and a big headache. Enjoy your post-deal phase, and avoid court.
• Joint liability – the person harmed could be awarded damages and collect from anyone, or all of the liable parties. The liable parties would be required to pay the entire damage award, which could be split among multiple parties or could come from just one party
• Several liabilities – each target stockholder pays only for that target stockholder’s relative contribution to the damages. The acquirers will generally aim to make every target stockholder responsible for the full amount of any and all future claims. As you would expect, however, target stockholders will generally resist this approach and therefore these clauses can take up a substantial amount of time.
All negotiations will include a set of closing conditions, which must happen in order for the related parties to ‘close’ the transaction. These are often confirmed in the final hours but are often mentioned in the letter of intent. It is good practice to outline the major conditions as early as possible as you do not want to blindside the other party. Common conditions are board approval, the absence of any material change in the target’s financial conditions, the absence of litigation, the delivery of a legal opinion from target’s counsel and requisite stockholder approval. Stockholder approval is also a closing condition that can cause substantial debate. Generally, you have a set of legal requirements, which are generally low, and then a threshold set by the target. Targets can typically request a very high threshold of approval, ranging from 90% – 100%. If you are the target, before you set the threshold review your stockholder structure carefully, the more stockholders to approve the transaction the better, but you do not want the acquirer to have the ability to walk away from the transaction easily after all that work.
HSR / timing issues
When entering the negotiation period of an M&A transaction, the parties should discuss long-term lead items as soon as possible. An example for this is whether or not a Hart-Scott-Rodino filing will be required. The HSR Act explains that parties must not complete certain mergers and acquisitions until they have made a detailed filing with the United States Federal Trade Commission (FTC) and the Department of Justice (DOJ). In certain circumstances, the 30-day waiting period can be waived, but leaving this to the last minute can result in delays. You also need to discuss other issues that may delay proceedings by more than 30-days, and this may require you to reach out to law or tax experts to ask for common practice.
Non-competes & Non-solicits
Non-compete and non-solicits are clauses that give the buyer some control over the actions of the seller, over a set time frame. The seller is the expert of their company, and if they are not willing to work for the acquirer after the deal is finalized, it protects the buyer from the seller competing.
• Non-competes – An agreement between the two parties, where the seller agrees not to use proprietary information in business efforts for a set period of time. Although the time is negotiable, it ranges from 3-5 years. It is generally required as the seller could gain a competitive advantage by using confidential information or trade secrets for their benefit. This could include customer/client lists, business practices, upcoming products and marketing plans.
• Non-solicits – Restricts the seller from soliciting either (a) employees or (b) customers of a business after the sale. Every team has star performers and taking these to other companies, even ones that do not compete is a common disadvantage to the acquirer post-sale. This does not mean staff cannot resign, it means they cannot go work for their old boss.