Presenting a live 90-minute webinar with interactive Q&A Negotiating Contractual Indemnity in M&A Deals: Transactional and Litigation Considerations Structuring Terms to Minimize Financial Risks, Measuring Damages in the Event of Breach THURS DAY, MAY 1, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Lisa S . Lathrop, Partner, Jones Day , Chicago Adam R. S chaeffer, Partner, Jones Day , 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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Negotiating Contractual Indemnity in M&A Deals May 1, 2014 Lisa Lathrop and Adam Schaeffer, Jones Day
Goals • Talk about recent experience and trends in negotiating indemnification provisions in M&A deals. • Highlight most negotiated and “trendy” indemnification issues and provisions. • Assuming basic understanding of indemnification provisions (i.e., what they generally do / how they work). • Happy to answer questions, basic or complicated, at the end or offline. 6
I. Indemnification Generally 7
Indemnity – Generally • A contractual remedy for specified items (e.g., breaches of contract; specified liabilities) • Absence of an indemnification provision doesn’t mean that a contracting party doesn’t have a remedy; rather you would have a breach of contract claim • Indemnification provisions not only help the injured party recover, they limit the indemnifying party’s obligations 8
Key Components • Indemnified / indemnifying parties • Subject of indemnification • Limitations on indemnity • Survival • Caps, baskets, etc. • Other carveouts and limitations • Procedures for making indemnity claims (third- party; direct) 9
Source of Indemnification • Seller(s) / Buyer • Escrows • Holdbacks • Setoff • Is recovery limited to a particular source? 10
Indemnification in Multi-Seller Transactions • Joint vs. several liability • Joint: “The Sellers will, on a joint and several basis, indemnify the Buyer Parties from and against any Losses arising from any breach of any representation of the Company . . . ” • Several: “Each Seller will, on a several and not joint basis, indemnify the Buyer Parties from and against any Losses arising from any breach of such Seller’s representations . . . ” • Pro rata share of each claim • “Each Seller will indemnify the Buyer Parties up to its Pro Rata Share from any Losses arising from any breach of any representation of the Company . . . ” • Individual caps • Consider applicability among various indemnity provisions • Indemnification through ancillary agreements 11
Items Typically Subject to Indemnification • Breaches of reps/warranties • Breaches of covenants • Excluded liabilities • Pre-closing liabilities (asset deal or quasi- asset deal) • Pre-closing taxes • Specified matters • Environmental items • Litigation items • Items disclosed during diligence 12
Definition of Losses • Key seller concepts: • Opportunity to embed exclusions of consequential and punitive damages • Opportunity to resist “diminution of value” claims or losses based on a multiple • Opportunity to embed “de minimis” concept • Key buyer concepts: • Resist seller’s request for exclusions • Try to cover costs of bringing indemnification claims • Example: “Loss ” means to the extent actually paid or incurred: all losses, liabilities, damages (including excluding consequential, incidental and indirect damages and lost profits), judgments, interest, Taxes, deficiencies, demands, payments, fines, costs, penalties, amounts paid in settlement, assessments or awards and reasonable out-of-pocket costs and expenses incurred in connection therewith (including costs and expenses of suits and Legal Proceedings) and investigation and defense thereof, and reasonable costs and expenses of enforcing a Party ’ s rights hereunder. 13
Exclusive Remedy Provisions • Keystone of indemnification provisions – meant to give parties (especially seller) certainty as to what its obligations are under agreement • Commonly exceptions to exclusive remedy provisions • Beware of broad definitions of fraud under state law • Carve out entitlement to injunctive relief / specific performance provisions and price adjustment mechanisms from the exclusive remedy provision • Be mindful of stand-alone tax indemnifications buried in the “Tax” section 14
II. Limitations on Indemnification 15
Limitations Generally • Monetary: caps / baskets / mini-baskets • Time periods • Types of losses • Net losses • Subjective limitations and “gotchas” 16
Monetary Limitations • Caps • Breaches of reps vs. covenants; other indemnification obligations • Baskets / deductibles • Basket: “Seller is not required to indemnify . . . until the aggregate amount of all Losses exceeds $[__] (the “Threshold”), in which event Seller is responsible for the aggregate amount of all Losses, regardless of the Threshold.” • Deductible: “Seller’s obligation to indemnify . . . only to the extent . . . Losses exceed $[__].” • In the market, deductibles are about twice as prevalent as tipping baskets 17
Monetary Limitations • Common Basket carveouts • Fundamental representations • Taxes • Benefits • Environmental • Title to assets • Most frequently, indemnification claims other than those arising from breaches of representations are not subject to basket 18
Monetary Limitations • Mini-baskets / de minimis thresholds • Functions in place of an overall materiality threshold • “No Indemnified Party will be entitled to recover for Losses with respect to any individual claim [for a breach of any representation or warranty] unless and to the extent the Losses associated with such claim [or series of related claims] exceed $[__], and any such claim [or series of related claims] will only count toward calculation of the Basket to the extent [if] exceeding such amount.” • Consider pairing the materiality scrape with the mini-basket • “for purposes of determining the amount of any Losses or the occurrence of any breach of a representation . . . all materiality, Material Adverse Effect and similar qualifiers shall be disregarded” 19
Time Periods to Bring Claims • Time limitations on claims for breaches of reps and warranties vs. covenants • Carveouts • Statute of limitations considerations • Delaware: Marathon ; proposed amendments • I/M X Information Management Solutions – Must provide that claim survives if notice is given – Sample: “to the extent any claim for indemnification . . . is made on or before the date on which such representation expires, such representation will survive until the resolution of such claim.” 20
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