Presenting a live 90-minute webinar with interactive Q&A MAC Clauses and Indemnification Provisions in M&A Deals Structuring Terms to Minimize Transaction Risks and Post-Closing Disputes THURSDAY, DECEMBER 5, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: John C. Partigan, Partner, Nixon Peabody , Washington, D.C. Jeff J. Litvak, Senior Managing Director — Forensic Litigation, FTI Consulting , Chicago 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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MAC Clauses and Indemnification Provisions in M&A Deals Structuring Terms to Minimize Transaction Risks and Post-Closing Disputes December 5, 2013 14730531.1
Today's Presenters John C. Partigan Jeff Litvak Nixon Peabody LLP FTI Consulting jpartigan@nixonpeabody.com jeff.litvak@fticonsulting.com 6
MAC Clauses and Indemnification provisions in M&A Deals Agenda Negotiating MAC Clauses Negotiating Indemnification Provisions Reassessing Common Provisions Favorable to Sellers Overview of Merger and Acquisition Transactions and Disputes The CPA’s Role in Pricing MAC and Benefit of the Bargain Claims 7
MAC CLAUSES AND INDEMNIFICATION PROVISIONS IN M&A DEALS NEGOTIATING MAC CLAUSES
NEGOTIATING MAC CLAUSES WHAT IS A MAC? Means of allocating risks between signing and closing MACs used in different parts of the acquisition agreement: Representations, Warranties and Covenants – used to establish a threshold for determining the scope of disclosure or compliance relating to risks associated with changes in the target’s business — A representation may provide that the target has complied with ERISA except as would not have a Material Adverse Effect. — The agreement may include a separate representation regarding non-occurrence of MAC since a given date 9 9
NEGOTIATING MAC CLAUSES WHAT IS A MAC? Closing Condition - used to delineate the circumstances under which a bidder would be permitted to abandon the transaction without liability: Frequently referred to as a “MAC out” – appears in the conditions precedent to the bidder’s obligation to close 98% of the publicly filed deals surveyed included a MAC closing condition* *Nixon Peabody’s 2013 MAC Survey, analyzing 195 publicly filed acquisition agreements, including asset purchase, stock purchase and merger agreements for transactions with values ranging from $100 million to $54 billion that were dated between June 1, 2012 and May 31, 2013 (“2013 NP MAC Survey”). 10
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D.) Sample standalone rep provision: “During the period from the Balance Sheet Date to the date hereof…there has been no Material Adverse Effect and, to the Knowledge of the Company, no fact or condition exists or is contemplated or threatened which might reasonably be expected to cause a Material Adverse Effect.” 11 11
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D) Sample closing condition provisions: — “Buyer’s obligation to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions. . . — The representations and warranties of Seller contained in this Agreement were accurate as of the date of this Agreement and are accurate as of the Closing Date, except for any inaccuracy that would not, individually or in the aggregate, reasonably be expected to result in a [MAC].” or — “There shall not have occurred a [MAC] in the Company.” 12
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D.) — Simple “MAC” definition: “Material Adverse Change” means any material adverse change in the business, results of operations, assets, liabilities or financial condition of Seller, taken as a whole — Drafting Issues to Consider • Inclusion of forward-looking standard in MAC definition? Forward-looking standard was included in MAC definition 53% of the time* Example: “any event, change or effect that could reasonably be expected to be materially adverse to the business…” *Source: 2013 NP MAC Survey. 13 13
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D.) • Inclusion of “prospects” in MAC definition? According to the 2012 SRS Study, “prospects” included 13% of the time, down from 25% in 2009** Less prevalent in public deals where walk away right for MAC – none of the top 100 publicly filed deals surveyed recently included “prospects”* • Quantify materiality? According to a 2011 ABA Study, stated dollar amount included in MAC only 8% of the time*** ** Source: 2012 SRS M&A Deal Terms Study, analyzing private target deals between 2009 and the end of Q3 2012 (“2012 SRS Study”). ***Source: 2011 Private Target Mergers & Acquisitions Deal Points Study (“2011 ABA Study”) 14 14
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D.) Inclusions and Carve-outs — On average, 13 carve-outs per agreement* — Disproportionate affects qualifier included in MAC definition 89% of the time* — Changes in general economic conditions (95%)* — Changes affecting industry as a whole (91%)* — Changes in GAAP (84%)* — Announcement of Agreement (88%)* — Actions contemplated by the Agreement (73%)* — Employee attrition (40%)* *Source: 2013 NP MAC Survey.
NEGOTIATING MAC CLAUSES WHAT IS A MAC? (CONT’D) Inclusions and Carve-outs (each carve-out has the effect of diluting the definition from the perspective of the Buyer): — Acts of war or major hostilities (88%)* — Acts of terrorism (87%)* — Acts of God (67%)* — Change in political conditions (72%)* — Reduction of customers or decline in business (35%)* — Litigation resulting from any law relating to the agreement or the transactions contemplated (41%)* — Failure to meet revenue or earnings projections (80%)* — Changes in securities markets (62%)* — Changes in interest rates (37%)* *Source: 2013 NP MAC Survey. 16
NEGOTIATING MAC CLAUSES WHAT DOES CASE LAW TEACH US? Case Law — I n re IBP, Inc. Shareholder Litigation (Del. Ch. 2001) (“Tyson Foods”) • Delaware court interpreting New York law • Tyson sought to terminate deal based upon sharp earnings decline of IBP • Court granted specific performance to IBP • In absence of specific language, earnings volatility does not constitute a MAC — Frontier Oil Corp. v. Holly Corp. (Del. Ch. 2005) • Buyer sought to terminate for MAC based upon threatened toxic tort litigation • Court found that requisite likelihood of “catastrophic” result not established to constitute a MAC • Potential litigation costs of $15 million to $20 million relative to a deal size of approximately $340 million 17 17
NEGOTIATING MAC CLAUSES WHAT DOES CASE LAW TEACH US? — United Rentals, Inc. v. Ram Holdings, Inc. (Del. Ch. 2007) • MAC clause excluded the condition of the credit markets in the United States • However, specific performance not granted – the merger agreement was ambiguous on the subject and evidence established an understanding between the parties that the merger agreement barred the remedy of specific performance • Cerberus acquisition subsidiary required to pay $100 million termination fee 18 18
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