Deal Consummation Risk in M&A Transactions D l C i Ri k i - PowerPoint PPT Presentation

Presenting a live 90 ‐ minute webinar with interactive Q&A Deal Consummation Risk in M&A Transactions D l C i Ri k i M&A T i Negotiating MAC Clauses, Financing Contingencies, Reverse Termination Fees and Specific Performance THURS DAY, JULY 28, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: T d ’ f l f James L. Kelly, Partner, Pillsbury Winthrop Shaw Pittman , New Y ork Igor Kirman, Partner, Wachtell Lipton Rosen & Katz , New Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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July 28, 2011 DEAL CONSUMMATION RISKS IN M&A TRANSACTIONS Jam es L. Kelly I gor Kirm an Pillsbury Winthrop Shaw Wachtell, Lipton, Rosen & Katz Pittman LLP 212.403.1393 212 858 1121 212.858.1121 IKi IKirman@wlrk.com @ l k james.kelly@pillsburylaw.com

Overview of Presentation Introduction  Material Adverse Change (“MAC”)  Financing Contingencies and Reverse Termination Fees g g  Specific Performance  Q & Q & A  6

7 Introduction oduc o

Background g Prior to the summer of 2007  Less focus on protecting transactions from buyers’ failure to Less focus on protecting transactions from buyers failure to  perform Increasing valuations and favorable financing environment  Private equity buyers argued that sellers/ targets should rely  on “reputational” factors to mitigate the absence of legal protection Changed deal environment beginning in the summer of 2007 h d d l b h f  General economic/ industry conditions impact on target  businesses Overall reduction of valuation multiples  Difficulty and increased cost of financing  8

Impact of Crises p  Buyers sought to escape purchase agreements – stress test of acquisition structures and stress test of acquisition structures and agreements  Material adverse change conditions g  Limited remedies for buyer breach  Reverse break-up fee  Specific performance  Shell subsidiary structure 9

10 Termination Reverse Fees A Takeover Gone Bad - Provisions in Play Specific Performance MAC Out Contingencies Financing g

11 Material Adverse Change (“MAC”) C ) ge ( dve se C e

MAC Clause - Definition Material adverse effect/ change on seller/ target’s business, Material adverse effect/ change on seller/ target s business,   condition, results of operations “prospects” and “could/ would”  Allocates risk of deterioration of seller/ target’s business  between sign and close Generally allocates market risk to buyer and adverse y y  events that effect Seller to Seller (the Seller bears the risk it can affect and not the risk that it cannot) 12

MAC Clause - Carveouts MAC exclusions are the real focus of the negotiations in which  parties allocate risk Standard/ accepted carveouts/ exceptions to MAC  Announcement of deal/ identity of buyer  Changes in general economic financial or political conditions Changes in general economic, financial or political conditions   General changes in target’s industry  Changes in laws or GAAP  Securities markets  Acts of terrorism or war  Decrease in stock price  Failure to meet earnings estimates  Actions due to buyer’s request or required by the agreement  Carveout to carveout Carveout to carveout – for disproportionate effects on target for “disproportionate effects on target”  13

MAC Clause – Application pp DE Case law is pro-seller in interpreting MAC  Durationally significant, not “a short term hiccup” and must D ti ll i ifi t t “ h t t hi ” d t  be viewed from a long term perspective of a reasonable buyer (IBP v. Tyson) Measured against historical performance (not forecasts)  (Hexion v. Huntsman) Burden of proof rests on the party seeking to rely on the p p y g y  MAC (Frontier Oil Corp.) 14

MAC Clause - Carveout Creep Tyson/ IBP deal did not contain exclusions  Last ten years exclusions have multiplied and are now the  norm 1990s – 20% had a carveout 1990 20% h d t  2005 – MACs averaged more than 6 carve-outs  2007 - 32 or more various types of carveouts exist 2007 32 or more various types of carveouts exist   15

MAC Clause - Lone Star / Accredited Case Study The housing implosion exposed the MAC s faults and The housing implosion exposed the MAC’s faults and  sparked a new focus Accredited’s MAC had 13 exclusions – uphill battle to show  a MAC a MAC Buyers almost always uncertain in invoking a MAC claim  (pre-2008) Qualitative, not quantitative thresholds (i.e., loss of X dollars) Q lit ti t tit ti th h ld (i l f X d ll )  Lack of case law and no law on MAC exclusions  Lone Star’s claim was uncertain at best but it didn’t need to  be certain 16

MAC Clause - Qualitative versus Quantitative Q Q Parties still leave MAC largely undefined as a “material  adverse effect” rather than assign a dollar amount adverse effect rather than assign a dollar amount Opposing forces move toward settlement  So why not just assign a dollar amount?  17

MAC Clause – Post-crisis Era Reactions by Buyers  Eliminate some carveouts Eliminate some carveouts  Add additional conditions/ termination rights tied to specific financial performance (i.e., minimum trailing EBITDA)  Financing condition  Reverse termination fee (which caps damages in case of Reverse termination fee (which caps damages in case of failure to close)  Focus is on remedies of breach rather than the MAC it itself lf 18

MAC Clause - Does it still work today? Are targets more likely to refute buyer’s MAC claims?  Is MAC the option value in the deal even if price is Is MAC the option value in the deal, even if price is  determined before the parties define the MAC? Does MAC remain a bonding device to ensure a  renegotiation and loss sharing in the event of an adverse renegotiation and loss sharing in the event of an adverse event? How will MAC exclusions be applied if few came into play?  Can a MAC clause override the Delaware holding that a l d h l h ld h  MAC must be long-term and include short-term effects? Maybe MAC’s uncertainty is the point?  19

Financing Contingencies Financing Contingencies and Reverse Termination Fees Reverse Termination Fees 20

Financing Contingencies - Assurance at Signing Term sheet  Not legally binding Not legally binding  Often contemplates further diligence by lender  Main role may be to define what buyer is obligated to accept  “Highly confident”  Major factor during the Drexel Burnham/ Milken era  Reliance on reputational factors Reliance on reputational factors   Not legally binding  Sellers/ targets view as little comfort today  21

Financing Contingencies - Assurance at Signing Commitment  Purports to be legally binding Purports to be legally binding  Not all terms included, even in long form  Sponsor precedent  Conditions may not parallel acquisition agreement C di i ll l i i i  Material adverse change definition  Financial market status  Solvency  Specific financial metrics  Seller/ target not party  Different governing law/ forum selection from acquisition agreement  22