Presenting a live 90 ‐ minute webinar with interactive Q&A MAC Clauses and Indemnification Provisions in M&A Deals Crafting Terms That Minimize Transaction Risks and Post ‐ Closing Disputes TUES DAY, FEBRUARY 1, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Todd B. Pfister, Partner, Foley & Lardner , Chicago Catherine B. Nelson, S enior Counsel, Foley & Lardner , Chicago Jeff J. Litvak, S enior Managing Director— Forensic Litigation, FTI Consulting , Chicago ervices, PricewaterhouseCoopers , Dallas Lawrence F . Ranallo, Partner, Advisory S 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 February 1, 2011 5231036
Today’s Presenters Todd Pfister Larry Ranallo Foley & Lardner LLP Foley & Lardner LLP PricewaterhouseCoopers PricewaterhouseCoopers Catherine Nelson Catherine Nelson Jeff Litvak Jeff Litvak Foley & Lardner LLP FTI Consulting 5 5231036.1
MAC Clauses and Indemnification Provisions in M&A Deals Indemnification Provisions in M&A Deals Agenda Negotiating MAC Clauses Negotiating Indemnification Provisions Negotiating Indemnification Provisions Reassessing Common Provisions Favorable to Sellers t S ll The CPA’s Role in Pricing MAC and Benefit g of the Bargain Claims M&A Issues – From Dispute to Resolution M&A Issues From Dispute to Resolution 6 5231036.1
7 MAC Clauses and Indemnification Provisions in M&A Deals Indemnification Provisions in M&A Deals Negotiating MAC Clauses Negotiating MAC Clauses 5231036.1
Negotiating MAC Clauses What is a MAC? What is a MAC? Means of allocating risks between signing and closing Increasingly relevant given turbulent world Increasingl rele ant gi en t rb lent orld Terrorist Attacks – Wars – Financial Crises Financial Crises – MACs used in different parts of agreement Representations & Warranties – Separate representation regarding nonoccurrence of MAC since a given S f C date Modify representation regarding given subject to indicate absence of event, etc. leading to a MAC Closing Condition – Bringdown condition enabling a party (typically the buyer) to terminate the agreement and get out of the deal if the condition is not met 8 5231036.1
Negotiating MAC Clauses What is a MAC? (cont’d ) What is a MAC? (cont d.) Sample closing condition provision: “B “Buyer’s obligation to consummate the transactions ’ bli i h i contemplated by this Agreement is subject to the satisfaction of the following conditions: g . . . 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 Closing Date, except for any inaccuracy that would not reasonably be expected to result in a [MAC].” 9 5231036.1
Negotiating MAC Clauses What is a MAC? (cont’d ) 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 f f f S Drafting Issues to Consider Inclusion of forward-looking standard? – According to a 2010 SRS Study, a forward-looking standard was included in MAC definition 68% of the time* definition 68% of the time* “Could be” (22%) vs. “Would be” (61%) vs. other (17%) * Double materiality “problem” – Inclusion of “prospects”? – According to the 2009 ABA Study, prospects included in MAC definition 38% of According to the 2009 ABA Study “prospects” included in MAC definition 38% of the time** According to SRS, “prospects” included in MAC definition 23% of the time* Less prevalent in public deals where walk away right for MAC Quantify materiality? – According to the 2009 ABA Study, stated dollar amount included in MAC only 2% of the time (down from 8% in 2004)** *Source: 2010 SRS M&A Deal Terms Study, analyzing deals between July 2007-July 2010 (“2010 SRS Study”). **Source: 2009 Private Target Mergers & Acquisitions Deal Points Study (“2009 ABA Study”). 10 5231036.1
Negotiating MAC Clauses What is a MAC? (cont’d ) What is a MAC? (cont d.) – Inclusions and Carve-outs Included in MAC definition 92% of the time* Disproportionate effect qualifier included in MAC definition 88% of the time* Changes in general economic or political conditions (91%)** Changes affecting industry as a whole (91%)** Changes affecting industry as a whole (91%) Changes in GAAP (60%)** Changes in law (66%)** Announcement of Agreement (71%)** g ( ) Actions contemplated by the Agreement (60%)** Acts of God, war or terrorism (55%)** Case-specific matters, such as pending litigation Percentages even higher for public company transactions *Source: 2010 SRS Study **Source: 2009 ABA Study 11 5231036.1
Negotiating MAC Clauses What Does Case Law Teach Us? What Does Case Law Teach Us? Case Law In re IBP, Inc. Shareholder Litigation (Del. Ch. 2001) (“Tyson Foods”) In 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 B ht t t i t f MAC b d th t d t i t t 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 12 5231036.1
Negotiating MAC Clauses What Does Case Law Teach Us? What Does Case Law Teach Us? United Rentals, Inc. v. Ram Holdings, Inc. (Del. Ch. 2007) – Cerberus acquisition subsidiary required to pay $100 million termination q y q p y $ fee per acquisition agreement Hexion Specialty Chemicals, Inc. v. Huntsman Corp. (Del. Ch. 2008) – No financing out g Fairly typical MAC out (with limited carve-outs) Reverse break-up fee if buyer breached (no cap, if intentional breach) “Heavy” burden rests on party seeking to excuse performance and “poor y p y g p p earnings must be expected to persist significantly into the future” for decline in target’s earnings to constitute MAC Court found no MAC; Buyer liable for all damages Case may limit ability of buyers to renegotiate price and terms in turbulent C li it bilit f b t ti t i d t i t b l t market 13 5231036.1
Negotiating MAC Clauses What Does Case Law Teach Us? What Does Case Law Teach Us? Key Takeaways Party seeking to invoke MAC to avoid closing bears a “heavy burden” Party seeking to invoke MAC to avoid closing bears a heavy burden – to show MAC has occurred Parties may reallocate burden of proof in agreement – MAC ordinarily will be measured in years not months (i e MAC ordinarily will be measured in years, not months (i.e., – “consequential” change to long-term earnings rather than “short-term hiccup”) Specific metrics and benchmarks may be warranted – reliance on Specific metrics and benchmarks may be warranted reliance on – general MAC provision to terminate will be difficult MAC will be viewed in context of entire agreement, not in isolation – Buyer’s rationale for deal matters Buyer s rationale for deal matters Strategic vs. financial buyer may be important 14 5231036.1
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