Presenting a live 90 ‐ minute webinar with interactive Q&A MAC Clauses and Indemnification MAC Clauses and Indemnification Provisions in M&A Deals Crafting Terms to Minimize Transaction Risks and Post ‐ Closing Disputes TUES DAY, NOVEMBER 29, 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 Jeff J. Litvak, S enior Managing Director— Forensic Litigation, FTI Consulting , Chicago Kevin D. Kreb, Partner, PricewaterhouseCoopers , 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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5 MAC Clauses and Indemnification Provisions in M&A Deals November 29, 2011
Today’s Presenters Todd Pfister Kevin Kreb Foley & Lardner LLP Foley & Lardner LLP PricewaterhouseCoopers PricewaterhouseCoopers Jeff Litvak Jeff Litvak FTI Consulting 6
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 7 7 5231036.1
MAC Clauses and Indemnification Provisions in M&A Deals Indemnification Provisions in M&A Deals Negotiating MAC Clauses Negotiating MAC Clauses 8
Negotiating MAC Clauses What is a MAC? What is a MAC? Means of allocating risks between signing and closing Increasingly relevant given turbulent world Increasingly relevant given turbulent world Terrorist Attacks, Wars, Financial Crises – MACs used in different parts of agreement Representations & Warranties – “Stand-Alone” condition – S Separate representation regarding nonoccurrence of MAC since a given date t t ti di f MAC i i d t Modify representation regarding given subject to indicate absence of event, etc. leading to a MAC Used alone in about 36% of deals* Closing Condition – “Back Door” condition Closing Condition Back Door condition – – The Agreement includes an “Absence of Change” representation and a condition “bringing down” the accuracy of the seller’s representations and warranties. Bringdown condition enables a party (typically the buyer) to terminate the agreement and get out of the deal if the condition is not met Used alone in about 9% of deals* U d l i b t 9% f d l * A majority of deals include both Stand-Alone and Back-Door Conditions* – *2011 SRS M&A Deal Terms Study, analyzing private-target deals between July 2010 through September 2011 (“2011 SRS Study”) ( 2011 SRS Study ) 9
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].” 10 10
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 condition of Seller Drafting Issues to Consider Inclusion of forward-looking standard? – From July 2007 through July 2010, 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” in MAC definition? – According to the 2009 ABA Study, prospects included 38% of the time According to the 2009 ABA Study “prospects” included 38% of the time** According to the 2010 SRS Study, “prospects” included 23% of the time* Less prevalent in public deals where walk away right for MAC - for public deals announced in 2009, only 1% included “prospects”*** Quantify materiality? Q y y – 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 private-target deals between July 2007-July 2010 (“2010 SRS Study”) **Source: 2009 Private Target Mergers & Acquisitions Deal Points Study (“2009 ABA Study”) Source: 2009 Private Target Mergers & Acquisitions Deal Points Study ( 2009 ABA Study ) *** Source: 2010 Strategic Buyer/Public Target Mergers & Acquisitions Deal Points Study (“2010 ABA Study”) 11 11
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 12 12
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 13 13
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