Ensure That Artful Deals Are Painted With the Proper Strokes go - PDF document

Corporate Counsel Business Journal November ¡ December 2019 CCBJournal.com Ensure That Artful Deals Are Painted With the Proper Strokes go after an acquisition of that company. It can increase  Stradling Yocca shareholder Parker Schweich their customer base, increase revenue, and eliminate and CU Direct general counsel Erin Wilson the competitive issues. discuss recent trends – and important legal considerations – in the high-flying world of Schweich: On a cautious note, given the recent rise of mergers and acquisitions. uncertainty and volatility in the markets, companies are being more careful, both on the due diligence side CCBJ: Please describe some of the recent trends you and the integration side, in order to make sure that the are seeing in M&A, and what are companies are trying growth projections will be met. There are indications to achieve through mergers, acquisitions and divesti- that the economy is slowing down a bit, and companies tures right now? want to make sure that their acquisitions are successful. So they’re being a little more careful during the Parker Schweich: M&A has been extremely active this planning stages. year, and that trend is continuing. There are a number What are some key issues related to that due diligence of factors that probably have contributed to this: tax you just mentioned, and how are transactions being reform helped the economy; there’s been an easier U.S. impacted by the new privacy laws? regulatory climate; there’s a growing amount of cash available to buyers; credit is readily available and inex- Wilson: As far as the new privacy laws, it’s quite pensive; and sellers are seeing valuations continue to an interesting time, especially with the California rise, so it becomes more attractive to sell their business. Consumer Privacy Act (CCPA) now being used as a model On the buy side, deals are being done to acquire more for other states’ privacy laws, along with the latest customers, to solve any plateaus a company might be ex- privacy regulations in New York. From my perspective, periencing in its organic growth, or to expand or diver- there is concern. And this goes back to due diligence, sify products and services. Acquisitions of technology because of these new requirements. A company must also have been playing a role. On the sell side, companies be able to track every instance of non-public personal have been divesting business lines that aren’t within information, where it resides, how it’s flowing, and the their core competencies. fact that consumers now have an opportunity to request that you remove that data if you do not have a legally Erin Wilson: Another aspect of this is the consolida- required reason to have it. Again, these two issues go tion of technology platforms, even among competitors. hand in hand. If you are acquiring or merging with an Basically, we’re seeing companies consolidate their entity and those tracking processes are not in place, intellectual property under one platform. “If you can’t or they don’t already have the ability to remove that beat ‘em, join ‘em” – that kind of thing. If companies are information, you may be inheriting liability you didn’t perceiving a possible issue with a competitor, they may anticipate.

Schweich: We’re also seeing an expansion of reps and We’re seeing the consolidation of warranties in that space, and possible standalone technology platforms, even among indemnification as well. Hand in hand with the privacy competitors. issues, there is also laser focus on cybersecurity because any companies that have personally identifiable — ERIN WILSON information (PII) are targets. It’s very important to and that it is protected, especially if that’s driving the confirm that they have the proper systems to protect value of the acquisition. against hacks or loss of PII. More generally, there have been many hot-button In the context of M&A, how should companies identify issues in due diligence lately. Especially in California, and mitigate risk? What are some examples of a suc- there has been a lot of focus on the misclassification cessful risk mitigation strategy? of employees as independent contractors. California recently passed legislation that makes it more difficult Wilson: Some companies have a much higher risk ap- for companies to classify people who work for them as petite than others, and some are very risk-averse and independent contractors. take a more conservative approach – so the strategies We’ve seen in the news the can vary quite a bit. We look at information depending movement toward applying on the structure of the deal. From my perspective, it’s that law to ridesharing crucial to do a 30,000-foot look initially to identify companies and the gig the overarching risks. Once you identify them and see economy generally. As a where there may be gaps or areas of higher risk, then result, from a due diligence you develop your risk mitigation strategy. If it’s a rep perspective, making sure and warranty issue, you may have a little leeway in how that workers are properly you structure the clauses. But there are some risks that classified is something are just so completely inherent that I advise caution. that everybody on both Parker Schweich is a Sometimes something comes out during due diligence sides is focused on. And shareholder in Stradling's Corporate and Securities that you realize could cause so much liability that you when technology is in practice group and is a member may not have the ability to mitigate it. play, intellectual property of the fjrm's Mergers & Acquisitions, Public Company, ownership and protection and Emerging Growth practice Schweich: There’s legal risk and then there’s business groups. Parker helps clients and open source issues are raise capital, invest in or risk, and we try to bring them into alignment. We help very important parts of acquire businesses, achieve the company properly assess the legal risks, so that the successful exits and navigate the due diligence process – the complexities of company’s management team and board of directors can making sure the company corporate and securities laws. Reach him at pschweich@sycr.com. decide if they are comfortable with the business risk of owns or has a right to use the intellectual property moving forward despite the legal risk – or if it needs to

be fixed. That’s always a judgment call that needs to As we reach a longer bull market, be made. The art of it is figuring out how to find the companies are being more careful, right balance. to make sure growth projections are In terms of mitigating risk, there is definitely a lot met. more negotiation of reps and warranties these days because both sides are usually very focused on how — PARKER SCHWEICH to either shift or share the burden of the risks that disagree on how the business has been run post- are out there. And of course there’s the question of acquisition, so it is important for those provisions to be indemnification – who will bear the cost of that risk, carefully drafted. and will there be any kind of contribution toward bearing that risk, whether through a deductible in the Wilson: Another mitigation strategy is the use of a hold- indemnification provision or otherwise? There also has back, so that you have those funds available to address been an increased use of rep and warranty insurance, certain issues. One of the potential scenarios in these and that has an impact on the negotiation of reps and deals is that everybody gets their money and leaves the warranties and indemnification. table, and then something bad happens. People don’t like On the business side, when making a decision to hear this, but paper is paper. It costs you money to go about purchase price, companies look at the forward and enforce that paper. If you have funds in escrow, with projections of the target. A way to mitigate the risk the terms of a holdback clearly defined, it makes it a bit of those projections not easier. coming true is to put part of the purchase price into What are some post-acquisition integration consider- an earn-out provision. If ations and strategies? the target is confident it can hit those projections, Wilson: The best way to go about it is to begin struc- and in fact does hit them, turing your post-acquisition integration plan while the the sellers will get an transaction is proceeding. Processes are very helpful. upside benefit. By the same If you have working processes that can be implement- token, if the target doesn’t ed within the newly acquired entity, that’s assistive. Erin Wilson is general counsel for hit those projections, the Communication is key. In order to successfully integrate CU Direct Corporation. She was an ACC SoCal Rising Star Honoree buyer is protected against post-acquisition, you must have a communications plan in 2012, and a nominee for the that risk by not having to that all parties can get behind. Orange County Business Journal’s Women In Business award in pay the earnout. However, When these kinds of mergers and acquisitions hap- 2013 and 2014. Reach her at erin.wilson@cudirect.com earnouts can bring about pen, it creates anxiety among the employees, who inevi- litigation risk if the parties tably wonder if some of them are going to be let go. Your