Mock Negotiation Panel on Business Combinations

Introduction

• Presenter: Philip Theodore (Presiding Officer)
• Panelists: Richard Kimman (Silicon Valley-based partner, Hogan LEL), Joel Greenberg (Senior Counsel, Arnold and Porter, NYC)
• Context: Mock negotiation on terms in business combination transactions, focusing on drafting acquisition agreements

Key Themes

Current M&A Market

• Challenges for private equity sponsors
• Opportunities for cash-flush strategic buyers
• Context of an illustrative negotiation: Founder-owned target company negotiating with a large strategic buyer

Scenario Setup

• Basic Fact Pattern:
  • 100% founder-owned target company
  • Negotiating a $300M purchase price with a large cap publicly traded strategic buyer
  • No exclusivity agreement, some interest from other bidders
  • Common interest agreement in place for antitrust discussions
  • Expected delay in HSR process due to current super restrictive antitrust environment

Indemnification Provisions

• Initial Position: Seller's attempt for a no Indemnity deal based on current market prevalence
• Strategic Buyer's Rebuttal: Large strategics unlikely to rely fully on rep and warranty insurance, gaps in coverage
• Discussion on specific gaps: Interim breach, pre-closing covenants, consequential damages

Adjustments and Compromises

• Directly or Indirectly Verbiage:

  • Excessive and broad, not favored by sellers
  • Amended provision: Deletion of 'directly or indirectly,' foreseeable damages specified

• Consequential Damages: Differing viewpoints

  • Buyers: Expand coverage to cover all potential damages including those indirectly incurred
  • Sellers: Limit to foreseeable, direct damages
  • Outcome: Strong buyer recession, focus on traditional exclusions

Legal Fees

• Third-party lawsuits

  • Seller covers buyer’s defense costs if related to a seller representation breach
  • First-party disputes: Seller does not cover buyer’s legal expenses under the American rule
  • Alternative Options: The non-prevailing party in indemnification disputes may cover legal fees

• Non-meritorious Claims Indemnity:

  • Buyer’s expectation: Coverage even for claims later proven untrue
  • Seller rejection: Unfair, only valid breaches should be indemnifiable

Representations and Warranties

• 10B5 Rep:
  • Comprehensive coverage, seeks to cover all omitted material facts
  • Seller opposition: Adds unnecessary liability, arguments based on existing SEC rule coverage

Key Points and Market Practices

• Indemnification and Damages: Key Contentious Zones
  • Common Market Practice:
    • Seller should push back on overly broad buyer provisions
    • Indemnification covers specific foreseeable damages
  • First-party and third-party indemnification disagreements
  • Arbitration: Differences in preferences for resolving disputes in public courts vs. private arbitration
• Broader Implications:
  • Realize the impact of aggressive buyer terms on actual market negotiations
  • Understanding strategic vs. PE sponsored deal variations

Conclusion

• Important takeaways for practicing deal lawyers
• Areas where sellers need to be vigilant

Questions are welcome at the reception following this panel.