my name's Philip Theodore I'm the presiding officer for today's Final session which will present a mock negotiation of some very important and frequently contentious terms that often arise in the context of a business combination transaction I can think of no two more suited people to conduct this panel than Richard kimman and Joel Greenberg who are up on the stage Richard's a Silicon Valley based partner in the mergers and Acquisitions group at Hogan LEL he heads Hogan's global technology practice he recently burnished his reputation by representing Walmart in its $16 billion acquisition of a minority interest in flip cart which is a very interesting Indian e-commerce company majority interest was it a majority interest what did I say I'm sorry minority I'm sorry no actually it was a majority interest our co-panelist is Joel Greenberg who's a New York City based senior council with Arnold and Porter Joel has a very broad-based practice he does a lot of m&a for strategics and financial sponsors and he also does a bit of corporate finance among other accomplishments he co-chairs the annual National Institute on negotiating business Acquisitions which is sponsored by the ABA section of business law so I'm going to turn this over to Richard and Joel guys well thank you very much and good afternoon everyone Welcome to our last panel of the day our Bic Coastal simulated negotiation panel this is the panel where we get into the nitty-gritty of drafting acquisition agreements and of course there is nothing like a two-finger pour of Bush Mills to keep things freewheeling and fast moving so thank you Byron Egan we should all raise a glass to Byron Egan for being such a gracious host and generous bartender my name is Rick kimman and I'm an m&a partner in the Silicon Valley office of Hogan leveles joining me on the panel as always today is Joel Greenberg senior counsel in the New York office of Arnold and Porter Joel and I have done this panel for many years now but I would say Joel it's probably Fair stay never quite in a market like what we're seeing now and part of our job today is to give you all sense of what's happening in the current m&a Marketplace on both the Strategic side and on the financial sponsor side conveniently enough you may have seen this those of you who subscribe to law 360 but the refini of League tables all the way through Q3 just came out yesterday and they tell a story very similar to the story that we heard from the panel right before this suffice it to say it's a challenging time for private Equity sponsors it's a great time to be a cash flush strategic buyer and we'll elaborate on that a little bit as we go through today but before we get started today I'd just like to get a brief sense of the audience in the room so if you wouldn't mind just by raising your hands how many of you are actually Law Firm lawyers it's a good number and how many of you are representatives of rep and warranty insurance carriers or Brokers thank you that's helpful so our basic fact pattern for today's illustrative negotiation is a pretty simple one my client is the target company which we will assume is 100% founder owned so in addition to representing the target company I'm also representing the founder who is its sole stockholder and if a deal moves forward we'll be selling 100% of her stock in a Target company to a buyer but bear in mind that although the positions that we're going to be taking from a negotiation standpoint today and the negotiating outcomes of these positions are probably not going to change very much from what they would be if the target company were Venture back to provide some hypothetical context we can assume that the target company is an upand cominging profitable company with a solid growth trajectory I won't say what sector it's in and has attracted a little bit of Interest modest interest from maybe a few strategic and maybe even some private equity biders in the recent past so my client has meaningful negotiating leverage and she's not in a position where she absolutely has to sell the company but the seller is for the time being focused on one particular potential buyer a large cap publicly traded strategic buyer represented by none other than Joel Greenberg though I should warn you now that at various points in our presentation we're going to switch things up a little bit and we're going to assume instead that the seller and the buyer are both Financial sponsors so we can contrast the PE marketplace with the Strategic one they're different markets and they become even more different with the passage of the last nine to 15 months or so but for now assume we're dealing with a strategic buyer of a Founder back company and not a sponsor to sponsor deal the parties are in the midst of their negotiations they've aligned on a purchase price of say I don't know $300 million for all of the outstanding stock of the target company the parties have of course signed a fairly standard confidentiality agreement but there is no exclusivity agreement in place so the seller is free to explore other options if the negotiations aren't going well and if other options really exist in this market and the parties have also saw signed a so-called common interest agreement which has enabled their lawyers to have privileged discussions between them about the antitrust aspects of the deal and as a result of those discussions the parties have concluded even though this is the sort of deal that say four or five years ago would have sailed through the HSR process with out a hitch in today's super restrictive antitrust environment featuring as we've all seen hyperactive government antitrust enforcers an extended HSR review period is a distinct possibility so though the parties are confident the deal will ultimately go through there could be a five to six month or even longer delay between signing and closing so it's against this backdrop that our negotiations begin now Joel and those of you who are familiar with Joel or who have negotiated against Joel in real life know that this is a fair fairly typical scenario he has proferred his usual 120 page monstrosity of a first draft of a definitive stock purchase agreement it's a Joel Greenberg special it's exasperatingly dense and it's filled with sneaky traps for the unwary sellers lawyer but frankly most of the outrageous stuff isn't really sneaky it really isn't buried or concealed at all as we'll see in a moment the draft is very much in your face and reflecting Joel's I hesitate to say ual but overbearing buyer oriented approach that you take when you're on the buy side you zealously represent your client I prefer to view it as following Chancellor Chandler's admonition to be a forthright negotiator yes forthright to the extreme forthright on steroids so now we're obviously not going to have anywhere near enough time to address all or for that matter even most of the controversial Provisions in Joel's draft and because this year's UT program does not include a separate indemnification panel it has in past years the UT organizers have asked us if we would please focus on the always controversial post closing indemnification provisions and we're going to Endeavor to do just that so Joel I've taken a few excerpts from your draft indemnification section in your bloated stock purchase agreement and I put them up here on the screen in the big bold type that they deserve and hopefully everyone can read them as we go through them and for those of you who are nears side like me and don't have access to this on your laptops we've distributed hard copies of our slides I think they're on all the tables so you can turn to that now but first Joel right here at the outset I'm going to try to save us all some time and countless hours of tedious negotiation given the marketplace realities that we've already heard about from other panels but really the marketplace reality of the past four years I'm going to shortcut the process and ask for a no Indemnity deal and as you know Joel no Indemnity deals are very common these days they're facilitated by the thoughtfully designed and comprehensive policies of rep and warranty insurance that are available in today's market from very highly rated carriers and there are probably half a dozen great Brokers we already saw by show of hands that are sitting right here in this room who can help your client find the right buy side policy so what do you think Joel just can we eliminate the indemnification provision altoe and and just go home and let me tell you also off the Record just to cement this deal my client the seller might be willing to pay part of the insurance premium on the rep and warranty insurance policy maybe as much as 10% of the premium to get a deal done so what do you think have a deal Rick I think you're talking about the realities of the wrong Market basically in today's world World large strategic buyers like my client are not willing to live with repp and warranty insurance I mean there are just it's it's a great product and it's got enormous use in some context but given what our needs are it's just not going to beat them you've got first of all inevitably the insurer is going to start picking over the representations and decid it might not be able to cover this one or that one certainly it's not going to cover the 10 B5 rep and second you've got this pesky little problem of what they call interim breach where we're talking about conditions that occur between the signing and closing and are discovered between the signing and closing and as to those the typical weapon warranty insurance policy provide zero coverage that's it the market has moved a little bit in the insurance area and you can now start to get interim breach coverage on some deals but not a deal the size I mean this one is too big at 300 million Equity value to get in breach coverage and it's also it's going to be a real stretch to get them to cover a period as long as we're looking at because of antitrust you know it's a great solution if you're doing a mid-market PE deal and you going to close 30 days after you signed then you can get your your inter Bridge Covenant but not here so rck it's nice of them to offer to pay part of the premium but the premium isn't the issue it's the coverage let me ask you Joel would it change your mind if my client agreed to pick up 100% of the premium does that change your Calculus not really I mean that's just you know I I view that it's just shifting the purchase price slightly okay Joel Just for Market comp comparison purposes let's change the facts and assume this is not a strategic acquisition but rather a sponsor to sponsor deal with zero antitrust risk all right so we're probably talking about a period between signing and closing of little over 30 days so representing the PE sponsor on the buy side against a PE sponsor on the cell side here are you going to be more receptive to doing a no Indemnity deal in the current Market yeah I am and I mean the market is different and it's different for a couple of reasons it's different one because we're dealing with a small community and everybody sees each other on both sides of the deals all the time so what I demand today I'm going to have demanded of me tomorrow and with precedent to show it because the same law firms the same sponsors are doing deals with each other all the time second the interim breach problem is a much smaller problem with a 30 days to close than 6 months or more because there's a much lower probability that something would show up for anything to happen and lastly in a sponsor to sponsor deal what I typically get a lot of comfort from is the fact that you're going to have a small team of key managers who are rolling virtually all their proceeds from the first dealer of course certainly substantial portion into my deal and so anything that I suffer after the closing they're going to suffer too and they're in the best place to tell me about warts that are are floating around there right and you didn't mention some of the other gaps in the coverage of rep and warranty insurance for example pre-closing covenants which can be very important in these deals does that affect your thinking on this as a strategic yeah although I will tell you that it's certainly something I will as you you've seen from the draft tried to plug but we're going to have a negotiation and we're going to wind up I would suspect parsing the pre-closing covenants and some you you'll let survive and some you won't I I if you'll give me a surviving Indemnity on operate the ordinary course I've done a good job and you haven't but isn't that what some buyers have sought to do again stepping out of character here to say okay we'll rely on rep and warranty insurance as long as you indemnify me for all the gap and that sounds good in theory I've never seen it happen in practice I know Joel you mentioned to me earlier today that you actually succeeded in in getting that Arrangement very rare and it's just not in the cards it is rare but I just did a deal and you know with a large Pharma strategic where we did exactly that and it became very complicated as you say because one of the things the weon warranty insurer did is they decided they were going to renegotiate for their purposes three or four of our reps so that we even had different rep coverage we had the interim breach issue it's complicated but it got us to the point where we had full Indemnity coverage right albeit some of it from an insurer yeah and even before the current market conditions expressed themselves large strategic acquirers were very reluctant as a general manner to rely on rep and warranty Insurance unless they were forced to do so because they were playing in an auction with other private Equity buyers that could offer in effect no Indemnity deals and the fact of the matter is is that those pure auction processes are much less frequent today than they were two years ago and uh so so I think we're stuck with the indemnity Provisions right for today yeah so let's go back to our original fact pattern strategic deal and I guess we're going to have to work through your very broad indemnification language and the first excerpt is from your operative indemnification provision it's up on the screen let me read it it says seller shall indemnify buyer against any damages directly or indirectly incurred by buyer as a direct or indirect result of or directly or indirectly related to any inaccuracy in any of the sellers representations Joel do you think this is standard verbiage for an indemnification provision certainly a standard start point so cuz I don't think it's standard at all honestly Joel I actually think you may have some sort of weird medical Affliction that I might call indirectly itis or something and I hope it's not contagious but let's count the number of times the word indirect appears in this single 35W sentence I count three and the phrase directly or indirectly accounts for about 25% of the words in this sentence why do you feel you need this directly or indirectly verbi why do you keep repeating it over and over and over again look partly because I know some of them are going to come out in negotiations and I want one or two left but also what we're trying to do is ultimately give direction to a court that they're supposed to read these things broadly and that if there's a chain of events that runs from a breach to a uh to damage that my client suffers we don't want to start getting into argu ments about you know whether it would have been recoverable at common law in 1850 when you site Hadley against Maxon Del but I'm glad you raised that because that's exactly why I object to your provision it's an attempt to undo almost 200 years of settled anglo-american jurist Prudence because when I was in law school they teach us about that case named Hadley versus bendale decided in 1854 to be precise and I'm sure you learned about it when you were in law school Yale am I right about that of course when you learned about it it we got it in the Advent yeah it was probably a recent case when you learned about it but it stands for the proposition that indirect damages are not recoverable only forseeable damages are and your client should not be able to recover unforeseeable damages arising from some unforeseeable Rube Goldberg type chain of events or or if I can mix my contract metaphors with my tort law metaphors arising from some completely unpredictable Paul's graian scenario remember the Paul's graph case from tort FLW class anyway I'm not going to agree to that verbiage look first of all direct or indirect doesn't necessarily go to foreseeability it goes to how long the chain of events is but quite candidly I think we can probably get some of that out here but I will tell you that I don't consider myself Bound by a common law that arose in an era where what people were suing about were broken camshafts and carts and Barren cows and things like that I mean the world has moved a little bit and your company isn't like that Joel I couldn't disagree more it is a venerable principle it's withstood the test of time it's as appropriate now in technology related disputes as it was two centuries ago in disputes about busted crankshafts so check out the screen and here's what I propose to do to your language which by the way we can talk about this and I do see the directly or indirectly verbiage in a lot of buyers first drafts but I definitely do not think it's a market Standard so first I'm going to delete all the directly or indirectly I'm going to eliminate it entirely I'm not going to just leave directly in there because I con see that that would be going too far in the other direction next I'm going to delete your relating two Clause because it expands the causal Nexus in an unsatisfactory way because consequences that somehow relate to a breach may not have a causal relation to the breach so that goes too far for the same reason that directly or indirectly goes too far there has to be a foreseeable causal relationship between the breach and what triggers it third I'm going to add the word foreseeable before damages just to enshrine the venerable principle of Hadley versus baxendale and fourth In The Same Spirit I'm going to delete the reference to Lost opportunities in the definition of recoverable damages because lost profits and the like should not be automatically recoverable I'll concede that they are recoverable in certain contexts but whether they're recoverable or not should be a question of the particular facts in each case including whether they're foreseeable so Joel I'm going to ask you to step out of character you've already hinted at this that these types of changes especially getting rid of the directly or indirectly are changes that you're probably inclined to agree to if you get called on I think when we get there what I am inclined to agree to are to delete what I will call most of the words of expansion so I'll take out directly or indirectly what I'm not particularly sympathetic to are your attempt to put in words of limitation so that reasonable attorne fees is all right I'll give you that one but for example to look to the end your consequential damages exclusion is not going to fly and I think that your diminution or decline and value is absolutely an appropriate measure if it sources from the breach because that may be the only way we get made whole fair enough Joel but before we get to those points which we will get to the idea of Crossing out directly or indirectly probably okay right said that what I'm probably willing to do for you and then relating to I mean we've talked before about how that really expands the universe of things that are recoverable from caused by or as a result I I think I would be willing to say caused by or resulting from or something like that fair enough I just have to say based on my experience on the buy side I am frankly amazed at how often the sellers fail to push back on the directly or indirectly or relating to verbiage these are fundamental issues that they should win and not pushing back on them has really substantive adverse effects on the sellers and instead they tend to waste their time focusing on Fringe issues of much less substantive import so this is a lesson for those of you who frequently find yourself on the cell side and I know that's a fair number of you and I will regret saying this if I ever find myself representing a buyer opposite any of you even in what's become much more of a buyer's market you should not be putting up with this over Brad buyer oriented verbiage you owe it to your client to fight back on this stuff so let's jump back into character Joel with you forcefully representing the Strategic buyer boyed by my success in this last round of negotiations as you can see I have added an exclusion to the definition of Damages at the very end in red that says you specifically exclude consequential damages from your definition of recoverable damages because I see consequential damages disclaimers in all types of agreements Consulting agreements IP license agreements and on and on and on and I don't know why this type of contract a business acquisition agreement should be any exception to that at all and if I recall my law school contracts class consequential damages are basically the same thing as indirect damages and you've already agreed to cross out the words indirectly in the main demn ification paragraph So you good with the consequential damage not a chance not a chance and look the contracts you're referring to tend to be contracts where the transaction value is way out of proportion to the harm that be the source of a a damage claim for example you've got somebody takes on a Consulting assignment and they're going to get a fee for a month's work of advice and they're not prepared just as a commercial benefit bargain thing to go on the hook for overall damage to the value of the business if the advice goes bad or if they say if you get to sell a software program that has a glitch in it and the glitch winds up costing the buyer a lot of money I think you'll find the license agreement you signed one excludes consequential damages and two limits recovery to the amount of the royalty paid to start with the license fee but this is completely different we are buying and paying for the entire Goodwill of this business and so if it is destroyed by something that occurred on your client's watch and was the subject of a representational warranty there shouldn't be a limit simply because it's a big number and it was unlikely to happen it did happen and I said the Consulting software kinds of agreements uh you know of really no relevance to me as a presedent here right but you've already agreed to exclude indirect damages no we didn't we agreed to take out the express inclusion of indirect damages that's a little different you said you wanted to rely on the common law and I said I was willing to live with taking out direct or indirect that doesn't mean that I was willing to say but not indirect damages I'm willing to let the tests of contract claims for where they made the big difference and then let me just add one other thing about consequential damages I don't know if Glenn is in the room but one of the speakers here tomorrow has spent a good portion of the last half dozen years writing about why no one knows what consequential damages mean in the context of m&a agreements and so you are agreeing to something where it is entirely unpredictable what a Court's going to do with it right and I stepping out of character Joel then Vice Chancellor strin one of our favorite Delaware jurists is on record as having said that words like consequential damages are either inserted or excluded from Provisions like this by lawyers who really don't know what they mean so they really didn't teach us very well in law school because it is hard to know what consequential damages are and particularly it's hard you have to think of this in terms of what is a court going to do with it if the claim is in front of it and the simple answer is in the m& context in in many cases I don't know and if I don't know what it's going to do it isn't going in a contract that I'm recommending to my client right so let me try to take one more shot at this Joel in character I know you're a former chair of the aba's m&a committee as am I and I just checked that committee's private Target m&a dealpoint studies for the past decade and consequential damages waiver I'm requesting appears in these agreements much more frequently than I think you might think because according to those studies sellers win this point anywhere from 25% to 50% of the time so this appears to be the kind of thing that sellers went on a good chunk of the time what do you have to say to that what I have to say is the dealpoint studies I think are a great product because there was nothing else like them but you also have to understand where they come from and where they come from is an analysis of agreements filed as exhibits secc filings by the buyer since these are private company acquisition agreements and that means that we have a very distorted Universe of transactions in there because I'll tell you the client I'm representing in this deal they never file acquisition agreements with the SEC none of them meet a materiality threshold and you know I dare say that if you wanted to find out what Microsoft's acquisition pattern was in agreements you couldn't do it by surveying the ad agreements they file with the SEC cuz they're not there what you've got is a lot of agreements filed by mid-market or smaller public companies and on a variety of sellers but a lot of them basically sellers who are founders or other smaller public companies selling a division it's a limited body of of precedent and I will tell you that well I don't have statistics to point to because the stuff is private if you talk to anybody who represents bulge bracket strategics in m&a work they will tell you that the market is very different from what those dealpoint studies show on this point and quite a number of others too and out of character I agree 100% I spent a lot of time on the buy side as well representing large and mega cap strategic acquirers primarily but not exclusively in the tech sector never agree to an exclusion of consequential Damages no matter what the leverage equation is in the deals that they do so buyer should win this point and it's an important lesson for those of you representing buyers in the Strategic Marketplace even in smaller deals frankly and if if you want more of the details I commend to you two articles that are pretty easy to find in the anals of the business lawyer written by Glenn West both have consequential damages in the title and he's got there's a lot of case law there and you read both articles and you'll come away knowing that you don't know what consequential damage waivers do too never agree to it I mean it's a pretty bold statement and so I'm just I'm curious I mean some areas especially the energy which of course here in Dallas there's lots of people that do energy work the vast majority of the value swing is in the title and environmental due diligence provisions and so just wondering your thoughts on waver consequential damages in the context of a PSA in say the Upstream again putting on my buyer hat I think in a fully priced acquisition in the m&a context as opposed to other contexts those should be recoverable the hypothetical as you know that we often give to illustrate how important a consequential damages waiver can be for a seller is the situation where one of the basic representations about compliance with law which applies to energy companies as well and it turns out that representation is wrong and as a result the target company's plant is shut down for 6 months waiting for them to get the permit that they should have had but they didn't have and representation that says you have all permits necessary to operate the business is wrong the 6 months of lost profits Joel you're going to want to recover but the $155,000 fee for getting the license that's not enough you want recovery for a full measure of Damages in that context and I think the key Point again from the buyers perspective is I've paid for those profits the fully priced deal reflects the expected cash flows from the business the whole business and if part of it is shut down because the seller forgot to get a Wastewater discharge permit and it's discovered two months after the closing as you say giving me the fees to get the permit is not going to make us whole or even close to it so next issue Joel Still focusing on your definition of Damages which remains up on the screen here in particular and I'll go back to the original language here i' i' like to understand your parenthetical in the definition which describes the circumstances in which my client is required to reimburse your client's legal fees so let's look at the first component of your parenthetical because your parenthetical has two separate components the first of which I agree with and the second of which I don't but let's look at the first component just so I can fall on my sword and make a concession that I won't object to your first component what this component seems to be saying is that if the seller my client has breached one of its reps and there's a related lawsuit by a third party after the closing the seller my client will pay the buyer legal fees in defending that lawsuit so for example if a third party sues the target company which of course is the buyer's subsidiary after the closing so this is a post closing lawsuit rightly alleging that the target has infringed the third Pary patents for example before the closing and if the seller made a specific representation as it almost always will in the acquisition agreement that the target company did not infringe prior to closing any third party's IP at all then the seller and not the buyer should pay the legal fees incurred in defending that third party lawsuit and we know that when it comes to infringement claims we're talking about potentially tens of millions in legal fees it's not I mean to me that seems uncontroversial and quite candidly the only reason because those are foreseeable damages from the breach going back to your hadly con we're going to get sued for infringement we're have to spend a lot of money in an effort to defend it but the only reason you put that kind of language in an agreement is that there is this traditional notion which comes up in other places and you're about to get to it that attorney's fees don't get included in the awards from lawsuits unless there's a fee shifting statute or something the so-called American Ro and we don't want any risk that a court is going to say I no no the American rule as every party Bears their own attorney's fees therefore we're not going to indemnify you for the fees of Defending against this third party Clan and Joel you had me at hello there because the principle does seem fair to me and I can accept it maybe with some minor language tweaks those legal fees are properly indentifiable damages in my view so we're in agreement there without you really having to say a word but what I don't think I can accept because it is a more direct violation of this American rule is the second component of your parenthetical which says that my client the seller has to reimburse the buyer for legal fees incurred by the buyer outside the context of Defending a third party claim in other words in the first party context for example in a first party indemnification dispute between the buyer and the seller you may be suing us for indemnification that has nothing to do with a third party claim it may be first party claim that my assets weren't worth as much and you're going to ring up these incredible legal fees with your high-priced Council and then say at the end of the day no matter what the outcome of the dispute that well the these are indemnifiable damages in this first party dispute I just can't agree with that because it violates the basic American rule that in a lawsuit between two principal parties each side pays its own legal fees and you've drafted this in a one-way manner so that the seller always has to pay the buyer's legal fees but the buyer never has to pay any of the seller's legal fees so to me this is an example of that sneaky over-the-top drafting that I referred to earlier will a court even enforce this provision when they enforce it I don't think there's any real question that they would enforce it the real question in getting these things enforced is to make it crystal clear to the court that's what you want there was a case in the Superior Court in Delaware a couple of years ago where a court actually enforced a provision like this and they did so on much less clear language and it C cided the reasoning was tortured but but they did honor the notion for this particular provision the language has to be crystal clear but you can contractually change the rules absolutely and to me you know this is very simple otherwise if you don't have a provision like this it's a riskless exercise for your client to at least initially resist paying the indemnification Provisions because they know that the worst award they're going to get is what the damages are to start with and that it's not going up by the fact that they litigated for yeah but Joel guess what it's really nice that a court is going to Force this provision but in this case no court is going to get that chance because I'm just going to reject this provision outright I'm going to do one of two things one just cross it out as I've done here in the markup or I'm going to replace it with a more balanced symmetrical provision that says well in the event of an indemnification dispute between the buyer and the seller the court or arbitrator that ultimately decides that dispute will determine the prevailing party and the non-prevailing party will pay the prev ailing parties legal fees that I think is fair you good with that approach that I might be willing to okay be willing to live with not the part that says the arbitrator because I abhor arbitration Provisions in these kinds of agreements oh wow how many of you on the buy side put arbitration Provisions in your purchase agreements or contracts just out of curiosity to see really that is so alien to my experience representing large often Tech oriented strategic buyers who almost always put arbitration Provisions in there because they don't want to get a public reputation for suing the target companies or their owners Joel do you really avoid arbitration on the buy side I do because in the transnational context you sometimes have to accept it because you can't find a court system that both parties would agree to but I tell you it is representing a buyer particularly if there's a great disproportion of size that the buyer is very very large it's large strategic and they're suing a Founder I really don't want an arbitrator's ability to be sympathetic I want a jury trial waiver and I want a judge have to write an opinion and your buyer clients your big buyer clients big strategics in any industry sector are willing to let these disputes play out in the public forum very different if you're talking about operating agreements Supply agreements even JV agreements we like arbitration but for m&a no my experience is just very different from all that the way we typically set it up is court for any pre-closing dispute so for example if there's a situation where the buyer is claiming that a closing condition hasn't been satisfied and is attempting to walk away from the deal and the target company says no specific performance and various other judicial remedies that can be important here and and the buyer may want various remedies that are more suited to courts fine cour but when it comes to indemnification in particular the most important post closing Covenant in many deals almost universally AR arbitration I would think that so much of what comes out in those disputes depending on what the nature of the reps are that are being targeted would be the kind of stuff that you wouldn't want to see play out in a public for so anyway let's get back to legal fees and I'd like to go back to the third party lawsuit scenario because in addition to your parenthetical and the definition of Damages you've included a clause in the operative indemnification Provisions that I actually had to read twice Joel because I couldn't believe my eyes the first time it's labeled a non-meritorious claims Indemnity and let me read it it just says seller shall indemnify buyer against any damages incurred by buyer as a result of at least we don't have directly or indirectly in there any claim asserted by any third party that if meritorious would constitute or give rise to an inaccuracy in any of sellers representations and warranties so let me get this straight going back to my example of the third party infringement lawsuit if some misguided third party brings a completely spous suit after the close alleging pre-closing patent infringement by the Target company and the third party loses that suit then I think you'd agree my client's non-infringement representation remains 100% accurate right there was never any infringement pre-closing do you actually expect my client to indemnify your client for its legal fees incurred in successfully defending the spurious non-meritorious lawsuit when there has been no breach of her representation the deal is and I'm going back to the original indemnification language here the deal is in the actual indemnification language up on top that your client should only get indemnified if there's a breach an inaccuracy in a rep and now you're positing a situation where the rep was 100% true and you're asking for tens of millions of dollars of legal fees that you incurred because I allowed you to defend third party claims even though I'm paying the freight that's a point you won on earlier I understand it but now you want me to pay those legal fees even though there was no breach of AR how do you justify that I do because for two reasons one very often even the claim we Prevail on is going to be focused on conduct that occurred during your client's watch one example from your part of the world is I buy a company that's was a development Stage Company and then after the closing a dozen ex employees show up waving the offer letters they got when they first came to work for your client and they say oh you know this provision of the offer letter while it doesn't say that I get stock kind of implies that I get stock and you know I'm going to ask a court to award me a portion of the deal price based on this ambiguous letter and say we win that case but it's still the only reason we went through it was because of things that your client did prior to the closing which formed the basis for the lawsuit second thing I should mention which is kind of interesting given my skepticism about the fullness of coverage of repon warranty insurance is a typical RW policy will cover that stuff without question I mean you don't even have to ask for it the base form they cover what they call defense costs and defense costs include the costs of investigating defending all stuff relating to a claim which if successful would trigger a loss it's kind of to find it because all that content is typically in the definitions it's not in the insurance Clause but it's in the definitions but it's there and know in fact at least what I'm used to is an agreement from the insurer that they will pay those costs as incurs once you're through the retention you don't even have to wait till resolution now from the insurance perspective of course and from your client's perspective also that is eating away at whatever cap we agree on it's not found money no of course and look I guess maybe in my attempt to administer the Cuda grass here take a look at your ABA dealpoint studies once again they confirm that non-meritorious claims indemnities very rare less than 10% of the time do you see them I will agree that in m&a agreements you often don't see it but I think representing a buyer you should see it more often that it is something that I think some people don't focus on and certainly the clients don't focus on until they've gotten into a situation where they've spent tens of millions of dollars defending say a patent claim that was purely pre-closing and they won and their lawyer says sorry we really have no basis for claiming against the seller right and look out of character I completely side with Joel on this one I think non-meritorious claim indemnities are fair and I'm actually shocked not to see buyers negotiate for it more often I know in my representation of large and mega cap strategic buyers they get this provision almost all the time and now of course by definition you won't see PE buyers negotiate for this in no Indemnity deals because there's no indemnification provision to negotiate but the insurance analogy that you mentioned Joel is somewhat compelling here so that on the buy Side Market practice needs to change on this one this is something that buyers I think should almost universally be demanding in their deals just to cover the situation that I mentioned it creates perverse incentives too doesn't it the notion that if you do a really good job of defending the non-infringement claim or the capitalization claim that your client loses that's right and that you should do a crappy job so that the seller will be responsible for the results of that crappy job and the legal fees so and also if you don't have a nonmeritorious Indemnity it complicates even more the question of getting consent to settlement yeah because if non-m maritor claims are covered then there's really nothing that the sellers should be arguing about as to whether this is a subtable claim yeah I will tell you that one thing that many buyers do do even if they don't press on the non-meritorious claims Indemnity in the case of capitalization there will be a separate line item Indemnity for capitalization or any claims made that relate to capitalization it won't say whether meritorious or not but that's the effect of the language and most buyers are covered in the capitalization context but but there than then patents are a good one because those cases are so damn hard to defend and so expensive another one would be antitrust if there was conduct pre-closing that is ultimately alleged to have violated the antitrust laws in the standards are hazy should the buyer really have to live with covering the cost of Defense okay last topic of the day Joel your overreaching reps and warranties there's a lot more for me to complain about here including your very broad no undisclosed liabilities rep that extends far beyond Gap liabilities to contingent and unac Creed liabilities we won't get into that debate here today but the rep I'm really most troubled by is your so-called 10 B5 rep and let's look at it it's pretty convoluted embodying as it does the confusing and well-worn double negative verbiage of SEC rule 10 B5 it says seller represents and warrants to buyer that neither this agreement nor the disclosure schedule contains any rep or other statement that omits to State a material fact necessary to make the representations or other statements therein in light of the circumstances in which they were made not misleading there's that double negative part but if I read it correctly it's a catchall rep that goes beyond the other 30 dense pages of representations and warranties that you've already included in this agreement what else Beyond those 30 pages of dance representations and warranties could you possibly need coverage for and why and why are you looking to this provision to provide it rick you know there's P it doesn't go totally beyond the Reps it any claim under this has got to find a next this in a specific line item representation because it has to be the emission has to be such as to render the representation and warranty misleading I'll take out the no you wouldn't have put this in unless you thought you were going to get more coverage somehow than if we there and had all those but I I'll I'll give you a couple of examples because I will tell you to start with I've never actually had to litigate one of these things but number of years ago I was doing a diligence project for you know in connection with a cide assignment and it was for a company that operated all over the world and we were sending questionnaires out to every division asking for schedules of contracts and da da and one of the things we asked them for was a schedule of real estate that they owned least I forget we may have used a couple of other words but that they worked with and one of the countes sent back this thing that said none and which was kind of interesting cuz they had a factory there and the general counsel the company and I called the local manager who basically said I don't know I asked my lawyer to fill this thing out but he knows our business and we talked to the lawyer and he said no no no we don't own that and we don't lease it and we don't rent it we license it and that's different in this country and you didn't ask about licenses well if I forget to ask about licenses in the Bas basic real estate rep I don't want you saying because it has a slightly different connotation it's outside that's where I can use this it's a gotta representation it's also the case where if you so you want coverage to cover the ineptitude of your own local Council for not having realized that the ABS and a second example I mean think of yourself let's look at the money laundering world if you give me a representation that says you scheduled every pre agreement of a certain typee that involves $10,000 or more and you know when you agree to that number that because your client deals in cash all the time and doesn't like filling out these pesky Bank reports it structures every contract to be broken down into contracts of $9,999 even if you sign 20 identical clients which is probably a violation of the banking rules but it's also I would say rendering this representation misleading hard to prove but you know this is not a standard that's new I mean this is a standard which every sale of Securities in the United States that uses the jurisdictional means of the 34 act are subject to under rule 10 B5 itself this is such an amorphous way of trying to cover this nebulous risk if there's something you missed put an explicit rep in that I can actually deal with and respond to on a disclosure schedule not some confusing amorphous catch all all R but how can it be that confusing if we now have at this point 80 years of precedent construing it into the Federal Security list this is not these words are deliberately copied from you know section 11 and Rule 10 B5 yeah so let me just step out of character here for the benefit of the audience because you get this argument a lot from buyers who are trying to justify a 10 B5 rep they're saying heyy look you're covered by 10 B5 anyway right what was the case Landreth Timber going all the way back that says that a sale of a business if it's structured as a sale of stock as our deal is doesn't matter that it's a sale of an entire business it's also a sale of stock and it's covered by 10 V5 so you're covered right so why do you object to just enshrining these protections that apply to you anyway in a rep that just memorializes what you're subject to anyway and the answer to that question and it's the answer that all of you attempting to resist this should be giving is well because the effect of that rep is very very different from the effect of the SEC rule for your client Joel to recover from my client for a violation of SEC rule 10 B5 your client has to overcome a lot of hurdles several species of causation Reliance at least in cases not involving an omission and most importantly the center hurdle you have to prove that my client the seller acted with center with evil intent among other things we can whether Center doesn't mean evil it can also just include knowing facts to the contract fine fine fine but to recover for a breach of the contractual rep the buyer doesn't have to prove any of that and even if my client didn't know the rep was inaccurate even if my client thought the rep was accurate so had no knowledge whatsoever my client can still be liable the rep reaches a king in to a strict liability offense so I'm not buying your disingenuous argument that this is no different from rule 10 B5 I can see that you can't read SC10 B5 too broadly it doesn't say I've told you everything that's material that's not I thought of that but we didn't put it the first dra yeah I'm sure and by the way I've actually seen buyers get away with a rep like that if you have a buyer that puts in his or her first draft a rep that says you've disclosed everything material to me it's time for you to pack up and go home and say I just can't deal with this kind of negotiation because that would be outrageous but the TV5 rep is somewhere in between I would also point out Joel that this rep is not market Standard the latest ABA private deal Point study shows you see this rep in less than 10% of the deal the 10 B5 reps were very common 15 years ago but according to the latest deal Point studies from the ABA they out of fashion you interesting the markets are diverging because I dare to say it's a lot more common in the giant cap strategic acquisition agreement than the ABA studies indicate on the other hand it's almost non-existent in private Equity sponsor respons well yeah let's talk about that because well first of all just to close it off on the Strategic side you're going to ask for this and you're going to press for it and I agree out of character 10 be5 reps are useful and they can be very valuable and they do provide material amount of extra coverage and the 10% statistic you see from the dealpoint study is really a different Market but let's distinguish again between the Strategic acquisition Marketplace and the PE Marketplace and I think that's where we're going to close because we have about a minute and a half left if your client the buyer is a PE sponsor and my client is a PE seller you're not even going to ask for this rep right I'm not and one of the reasons is that the dynamic is a little bit different there because most sponsor to sponsor deals start his auctions even if they don't finish his auctions and so you're working off a sellers form agreement that was put in the data room and you're telling all the potential buyers mark it up but Mark it up as little as possible because every change you make is going to be held against you and so it's not that you can just stick it in the form and hope that the Council on the other side decides not to make a fuss about it you've got to add it so it nice it shows up as a nice red red line when the draft comes back and I think a lot of people won't do that I won't normally right and the fact of the matter is that from a strategic buyer standpoint considering whether to use rep and warranty insurance this is a disadvantage of rep and warranty insurance they won't cover in my experience tp5 reps unless anyone in the audience tells me that that's moving in the direction of interim breach coverage you can some sometimes get it I don't think it is I don't think you can ever get it well thanks for your attention everyone we obviously have been able to get to anywhere near all or close to even all of the contentious points in the negotiation of a strategic or a private Equity acquisition but just a handful to give you a sense for some of the things that buyers counsel or sellers counsel may not be doing as good a job as they should be doing on and if you have any questions feel free to raise them I guess there's a reception right after this so we'll look forward to seeing you there and thanks for your attention and your [Applause] patience