Strategies for Buyers, Sellers, Investment Banks and Their Counsel - - PowerPoint PPT Presentation

M&A Engagement Letters: Strategies for Buyers, Sellers, Investment Banks and Their Counsel

Negotiating Scope of Engagement, Fees, Confidentiality, Termination, Indemnification and More

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Presenting a live 90-minute webinar with interactive Q&A Kevin Miller, Partner, Alston & Bird, New York Stephen M. Kotran, Partner, Sullivan & Cromwell, New York James Ben, Managing Director, Rothschild, New York

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• 5 -

Investment Bank Engagement Letters

Kevin Miller Alston + Bird LLP 90 Park Avenue New York, New York 10016 Tel: (212) 210-9520 Fax: (212) 922-3840 kevin.miller@alston.com Stephen M. Kotran Sullivan & Cromwell 125 Broad Street New York, New York 10004 Tel: (212) 558-4963 Fax: (212) 558-3588 kotrans@sullcrom.com James Ben Rothschild 1251 Avenue of the Americas 51st Floor New York, New York 10020 Tel: (212) 403-3500 Fax: (212) 403-3501 james.ben@rothschild.com

• 6 -

The Engagement Letter

Timing

• Investment banks generally require that an engagement letter be

signed prior to commencing substantive work on the engagement to ensure that there is a clear understanding of the terms of the proposed engagement, and that the Investment Bank has the benefit of an indemnity/release covering any advice and services rendered.

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• 7 -

The Engagement Letter

Scope of engagement

• The Investment Bank will act as the Company’s (or specified

committee of the Company's board) financial advisor (which may include rendering a fairness opinion).

• Some engagements are fairness opinion only.

7

• 8 -

The Engagement Letter

Scope of Engagement

Sample Provisions:

• Scope of Engagement. The Company hereby engages the Investment Bank to

act as the Company’s exclusive financial advisor in connection with the proposed acquisition (the “Transaction”) of [[insert Target’s full legal name] (the “Target”)]. [or, if a business division or assets of the Target are to be acquired, insert description of Target’s business (the “Business”)]. The term “Transaction” shall also include any transaction or series of related transactions whereby, directly or indirectly, control of, or a significant interest in, [the Target][the Business] or any of [the Target’s businesses or assets][the Business] is acquired by or otherwise transferred to the Company or any of its affiliates, including, without limitation, a sale, acquisition or exchange of securities or assets, a lease or license of assets (with or without a purchase

• ption) pursuant to a stock or asset purchase agreement or a merger,

consolidation or reorganization, recapitalization, spin-off, split-off, tender offer, leveraged buyout or other extraordinary corporate transaction or business combination involving [the Target][the Business]; 8

• 9 -

The Engagement Letter

Scope of Engagement

Selected Discussion Topics

• Opinion only v. broader financial advisory services

Impact on fees and fee structures

• Definition of Transaction
• Exclusive v. non-exclusive financial advisor

Reasons for engaging a second financial advisor (e.g., to address potential conflicts) Impact on fees and fee structures

• Company v. specified committee of the Company's Board

9

• 10 -

The Engagement Letter

Services to be provided

Clients should have a clear understanding of the services to be performed by the Investment Bank. the Investment Banks should have a clear understanding of the services they are expected to perform. The scope and complexity of the services to be provided affects the determination of the appropriate fees. In re Daisy Sys. Corp., 97 F.3d 1171 (9th Cir. 1996)

• Allegation of broad duties as exclusive financial advisor based on

nonexclusive list of services to be provided led to circumscribed lists of services in many engagement letters. 10

• 11 -

The Engagement Letter

Services to be provided Sample Provisions:

• Services. The Investment Bank’s services under this engagement shall,

to the extent requested by the Company and appropriate under the circumstances, consist of assisting the Company in:

• reviewing and analyzing the business, financial condition and

prospects of [the Company and] [the Target][the Business];

• reviewing and evaluating the financial aspects of the proposed

Transaction;

• developing a strategy to effectuate the Transaction;
• coordinating discussions and meetings with representatives of [the

Target][the Business] to gather information regarding [the Target][the Business]; and

• negotiating the Transaction.

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The Engagement Letter

Services to be provided Sample Provisions:

• In addition, to the extent requested by the Company and appropriate

under the circumstances, the Investment Bank agrees to [(i)] be available to meet with the Company’s Board of Directors to discuss the Transaction and its financial implications [and (ii) render an

• pinion (the “Opinion”) to the Board of Directors of the Company

(solely in its capacity as such) as to the fairness, from a financial point of view, to the Company of the consideration to be paid by the Company in the Transaction (or, in the case of an exchange of securities of the Company, of the exchange ratio)].

12

• 13 -

The Engagement Letter

Beneficiary of Advice

• All advice provided is intended solely for the use and benefit of the

[Committee of the] Board of the Company and may not be relied upon by any other person or used for any other purpose.

Baker v. Goldman Sachs & Co., 656 F. Supp. 2d 226 (D.

• Mass. 2009)

» Allegation of duties to other addressees of engagement letter led to scrutiny of addresses, avoidance of “you” and additional language regarding advice being rendered to directors “(solely in their capacity as such)”.

The SEC does not generally permit opinions and related disclosure included in proxy statements and Schedule 14D-9s filed with the SEC to include a corresponding disclaimer to the extent it purports to disclaim liabilities under the federal securities laws.

13

• 14 -

The Engagement Letter

Disclosure

• The Investment Bank’s advice may not be disclosed to any other

person except, if the Investment Bank renders a fairness opinion that is required to be summarized in a proxy statement or Schedule 14D-9 to be filed with the SEC and disseminated to shareholders, a summary of the opinion may be included in such filings subject to the Investment Bank’s prior review and written consent. Typically, a copy of the opinion is attached as an annex to such filing and qualifies any such description in its entirety.

• State law varies with respect to whether a fairness opinion should

be attached or summarized in a non-SEC filed merger proxy.

14

• 15 -

The Engagement Letter

Beneficiary of Advice and Disclosure Sample Provisions:

• [All][The Opinion and all] advice (written or oral) provided by the

Investment Bank in connection with the Investment Bank’s engagement [are][is] intended solely for the benefit and use of the Board of Directors of the Company (solely in its capacity as such), and [neither the Opinion nor] [no] such advice shall be used for any other purpose or be reproduced, disseminated, summarized, quoted from or referred to at any time, in any manner or for any purpose, nor shall any public references to the Investment Bank, the services to be rendered pursuant to this Agreement or the terms thereof be made by the Company without the prior written consent of the Investment Bank.

15

• 16 -

The Engagement Letter

Beneficiary of Advice and Disclosure (cont.)

Sample Provisions:

• [Include only if opinion is required to be publicly disclosed - Without

limiting the generality of the foregoing, to the extent required by Federal securities laws to reference and summarize the Opinion in any proxy statement, tender offer or other filing relating to a Transaction required to be filed with the Securities and Exchange Commission (“SEC”) and distributed to the stockholders of the Company in connection with the Transaction, the Opinion may be included in its entirety in any such filing with the SEC that is distributed to stockholders of the Company in connection with the Transaction and, to the extent expressly required by applicable law, the Company may also include additional disclosure regarding the Opinion, subject to the Investment Bank’s prior review and written approval.]

16

• 17 -

The Engagement Letter

Disclosure Selected Discussion Topics

Advisability of having a reference to opinion in press releases announcing transaction Disclosure of opinion to key stockholders or limited partners even if not legally required

17

• 18 -

The Engagement Letter

Legal relationship

The Investment Bank acts solely as an independent contractor and not as a fiduciary or agent.

• Schneider v. Lazard Freres & Co., 552 N.Y.S. 2d

571 (N.Y. App. Div. 1990)

Allegation of fiduciary duties to shareholders led to explicit disclaimers of fiduciary and agency relationships in engagement letters and in some investment banks’ forms of opinions

18

• 19 -

The Engagement Letter

Independent Contractor, not fiduciary or agent

Sample Provision:

• It is understood and agreed that the Investment Bank will act under this

Agreement as an independent contractor with obligations solely to the Company and is not being retained hereunder to advise the Company as to the underlying business decision to consummate any Transaction

• r with respect to any related financing, derivative or other transaction.

Nothing in this Agreement or the nature of our services shall be deemed to create a fiduciary or agency relationship between the Investment Bank and the Company or its stockholders, employees or creditors, in connection with the Transaction or otherwise. Other than as set forth in Annex A attached hereto, nothing in this Agreement is intended to confer upon any other person (including stockholders, employees or creditors of the Company) any rights or remedies hereunder or related hereto.

19

• 20 -

The Engagement Letter

Information

• The Investment Bank will be provided access to all relevant

transaction participant information and personnel.

• The Investment Bank will rely on all information provided to or

discussed with it or available from public sources (including financial projections) without independent investigation or verification.

• The Investment Bank does not perform “due diligence”.

20

• 21 -

The Engagement Letter

Information Sample Provisions:

• Information.
• During the period of the Investment Bank’s engagement hereunder, the

Company will furnish or arrange to have furnished to the Investment Bank all information concerning the Company, the Transaction and, to the extent within the Company’s control, the [Target][Business], that the Investment Bank deems appropriate and will provide the Investment Bank with access to the officers, directors, employees, affiliates, appraisers, independent accountants, legal counsel and other agents, consultants and advisors (collectively, its “Representatives”) of the Company and, to the extent practicable, the [Target][Business]. 21

• 22 -

The Engagement Letter

Information Sample Provisions:

• Information. (cont.)
• The Company recognizes and confirms that, in providing our services pursuant to this

Agreement, the Investment Bank will rely upon and assume the accuracy and completeness of all financial and other information furnished by or discussed with the Company, the Target and their respective Representatives, or available from public sources, and the Investment Bank does not assume responsibility for the accuracy or completeness of any such information. It is understood and agreed that (i) the Investment Bank will not and will have no obligation to verify such information or to conduct any independent evaluation or appraisal of the assets or liabilities of the Company, the Target or any other party, and (ii) the Investment Bank will assume that any financial projections or forecasts (including cost savings and synergies) that may be furnished by or discussed with the Company or the Target or their respective Representatives have been reasonably prepared and reflect the best then currently available estimates and judgments of the Company’s or the Target’s management, as

• appropriate. The Company will promptly notify the Investment Bank of any material

inaccuracy or misstatement in, or material omission from, any information previously furnished to the Investment Bank. The Investment Bank’s role in reviewing any information regarding the Company, the [Target][Business] or otherwise relating to the Transaction will be limited solely to performing such review as it shall deem necessary to support its own advice and analysis and shall not be on behalf of the Company.

22

• 23 -

Engagement Letter

Information Selected Discussion Topics

Who performs “due diligence”? What is the purpose of the Investment Bank’s review?

23

• 24 -

The Engagement Letter

Fees

• The fee structure and amounts must be tailored to fit specific

facts and circumstances. Examples of different types of fees, not all of which may be relevant or appropriate to a given engagement, include:

Fees not contingent on consummation of Transaction Financial Advisory Fee - generally payable upon execution of the engagement letter; and Opinion Fee - payable upon delivery of an opinion with respect to the fairness from a financial point of view of the consideration to be paid/received in the transaction.

24

• 25 -

The Engagement Letter

Retainer and Opinion Fees Sample Provisions:

• Fees. In consideration of our services pursuant to this Agreement, the

Company agrees to pay the Investment Bank the following compensation:

• A non-refundable fee of $[

] (the “Retainer”), payable in cash upon execution of this Agreement plus an additional [monthly][quarterly] fee

• f $[

] per [month][quarter], payable in advance for a period of not less than [ ] [months][quarters].

• [only include if an Opinion is to be rendered - A fee of $[

] (the “Opinion Fee”), payable in cash, one-half of which shall be payable at the time the Board of Directors of the Company requests that the Investment Bank begin work on the review of information and analyses necessary to render the Opinion, and the balance of which shall be payable immediately prior to the Investment Bank’s delivery of the Opinion to the [committee of the] Board of Directors.] 25

• 26 -

The Engagement Letter

Fees contingent on consummation of a Transaction Transaction Fee - payable upon the consummation of the transaction;

• Sellside - often a percentage of the aggregate value of the

transaction calculated on an enterprise value basis.

• Buyside - often a fixed fee

Tail - The Investment Bank will typically be entitled to its full Transaction Fee if a Transaction is agreed or consummated within a specified period of time following the expiration or termination of the engagement.

26

• 27 -

The Engagement Letter

Transaction Fee

Sample Provision:

• Buyside. If a Transaction is consummated or an

agreement with respect to a Transaction is entered into prior to the expiration of [18] months following the termination of the Investment Bank’s engagement hereunder and a Transaction is subsequently consummated, a fee of $[ ] million (the “Transaction Fee”).

27

• 28 -

The Engagement Letter

Transaction Fee (cont.)

Sample Provision:

• Sellside. If a Transaction is consummated or an

agreement with respect to a Transaction is entered into prior to the expiration of [18] months following the termination of the Investment Bank’s engagement hereunder and a Transaction is subsequently consummated, a fee (the “Transaction Fee”), based on a percentage of the Aggregate Value (as defined below), calculated as the sum of the following:

Portion of Aggregate Value Transaction Fee Less than $X MM __% of such amount; plus Greater than or equal to $X MM but less than $Y MM __% of such amount; plus Greater than or equal to $Y MM __% of such amount.

28

• 29 -

The Engagement Letter

Transaction Fee (cont.)

Sample Provision: “Aggregate Value” means (i) (a) in the case of a Transaction involving the capital stock of the Company, the total fair market value (at the time of closing) of all consideration paid or payable, or otherwise to be distributed, directly or indirectly, in respect of a Company common share in connection with the Transaction multiplied by the Company’s fully diluted shares

• utstanding, and (b) in the case of a Transaction involving assets of the

Company, the total fair market value (at the time of closing) of all consideration paid or payable, or otherwise to be distributed, directly or indirectly, to the Company or its stockholders in connection with the Transaction plus the value of any current assets not sold, plus (ii) the amount of all indebtedness, preferred stock and other liabilities and

• bligations, including capital leases, remaining on the [Company’s]

[Business’s] financial statements at closing or directly or indirectly assumed, retired, repaid, redeemed or defeased in connection with the Transaction. 29

• 30 -

Engagement Letter

Fees Selected Discussion Topics

Drivers of fee structures

• Opinion only v. broader scope of services
• Needs of client

Transaction value v. consideration received Length and triggers for tail provisions

30

• 31 -

The Engagement Letter

Alternative Transaction fees; Reimbursement of expenses

Alternative Transaction - The Investment Bank may be entitled to a customary fee to be agreed if the Company engages in a transaction that does not qualify as a Transaction. Expenses - The Investment Bank is typically reimbursed for its reasonable expenses, including legal fees, incurred in connection with the engagement.

31

• 32 -

The Engagement Letter

Alternative Transaction Fee and Reimbursement Provisions

Sample Provisions:

• In the event the Transaction involves a transfer of ownership or control
• f less than 50% of the then-outstanding voting securities of the Target,

no significant interest in any of its businesses or assets or an Alternative Transaction (as defined below), the fee payable to the Investment Bank shall be a fee that would customarily be paid to a nationally recognized investment bank engaged as a financial advisor in connection with a comparable transaction. The term “Alternative Transaction” shall include any transaction or series of related transactions involving the Company or any of its affiliates on the one hand and [the Target] [the Business] or any of their affiliates or any of their respective shareholders on the other hand, that does not constitute a Transaction (an “Alternative Transaction”).

32

• 33 -

The Engagement Letter

Alternative Transaction Fee and Reimbursement Provisions Sample Provisions (cont.):

• The Company will promptly reimburse the Investment Bank,

periodically upon request, for all out-of-pocket expenses reasonably incurred by the Investment Bank, including the reasonable fees and expenses of legal counsel, resulting from or arising out of this Agreement and the performance of the services pursuant to this Agreement (including related expenses incurred prior to the date of this Agreement), whether or not a Transaction is consummated.

33

• 34 -

The Engagement Letter

Alternative Transaction Fee and Reimbursement Provisions Selected Discussion Topics

Expense reimbursement dollar cap or required notice to Company before exceeding specified dollar threshold. Any limitations on expenses reimbursement do not modify or limit Company’s obligation to reimburse expenses in connection with any litigation, claims or other investigations.

34

• 35 -

The Engagement Letter

Other fees that may be appropriate include:

Progress Fee - generally payable upon achievement of certain progress milestones (e.g., execution of a letter of intent, memorandum of understanding or exclusivity agreement or, for a prospective buyer, the receipt of an invitation to participate in a further round of bidding, etc.). Announcement Fee - generally payable upon the first public announcement of a transaction. Breakup Fee - payable upon receipt by the Company of a breakup fee in connection with the termination of the transaction agreement.

35

• 36 -

The Engagement Letter

Other Fees Sample Provisions:

• A fee of $[●] (the “Milestone Fee”), payable in cash at the earlier of

(i) the signing of a letter of intent, agreement in principle or other similar agreement (whether or not binding on the parties thereto) with respect to a Transaction; (ii) the first public announcement by the Company or any of its affiliates of an intention to commence a tender or exchange offer to acquire all or a substantial portion of the Target’s outstanding voting securities; (iii) the mailing of a proxy statement or information statement with respect to a Transaction, and (iv) the date of any action by the stockholders of the Target by written consent or votes cast with respect to a Transaction or an agreement with respect thereto.

36

• 37 -

The Engagement Letter Other Fees (cont.)

Sample Provisions:

• If the Transaction is not consummated and either the Company or any
• f its affiliates is (i) paid, granted or otherwise becomes entitled to

receive a “break-up” or “topping” fee or any other payment or consideration (the “Break-Up Consideration”) in connection with or as a result of, without limitation, (x) the termination, abandonment or cancellation of the Transaction (or any effort to effect the Transaction)

• r (y) settlement of, or judgment in, any litigation or dispute relating to

the Transaction, or (ii) the Company sells, disposes of or otherwise transfers for consideration to the Target or any third party any securities

• f or other interests in the Target (or any rights thereto) which it

presently owns or which it acquires during the term of this Agreement, a cash fee (a “Break-Up Fee”) payable upon the Company’s receipt of such consideration, equal to [ ]% of the total fair market value of the Break-Up Consideration.

37

• 38 -

The Engagement Letter

Additional Business

• The appropriate Transaction Fee amount may depend on the

likelihood that the engagement will generate opportunities for additional fees for the Investment Bank (e.g., as financial advisor in connection with any related divestitures, restructurings, hedging strategies, financings or refinancings).

38

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The Engagement Letter

Additional Business

Sample Provision: Additional Services. During the period of the Investment Bank’s engagement hereunder and for a period of [18] months thereafter, the Company shall offer the Investment Bank the right to act as (i) lead managing underwriter, lead initial purchaser or lead placement agent for any financing involving debt and/or equity securities of the Company and as lead arranger of any syndicated loan financing undertaken on behalf of the Company or any of its affiliates in connection with the Transaction or otherwise (in each case acting as sole or joint book runner), (ii) principal counterparty on any foreign exchange or derivative transaction by the Company or any of its affiliates arising out of or relating to the Transaction, and (iii) financial advisor to the Company or any of its affiliates in the event of [any [significant] potential acquisition, disposition or other extraordinary corporate transaction (other than the Transaction) involving the Company or any of its affiliates or any of its or their assets, securities or businesses], whether by way of purchase or sale of securities or assets, merger, consolidation, reorganization, recapitalization, spin-off, split-off or otherwise, in each case on customary terms and conditions (including receipt of internal committee approvals), including fees that would customarily be paid to a nationally recognized investment bank engaged as its financial advisor, placement agent, initial purchaser, underwriting or in a similar capacity in connection with a comparable transaction.

39

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The Engagement Letter

Termination

• Typically, either the Investment Bank or the client may terminate

the engagement, but termination of the engagement does not relieve the client from its obligation to pay accrued fees, reimburse accrued expenses or, in the event a transaction is consummated or agreed to within a specified period of time following termination (commonly referred to as the “tail period”), the client’s obligation to pay a Transaction Fee.

40

• 41 -

The Engagement Letter

Termination

Sample Provision:

• Term. The Investment Bank’s engagement hereunder may be

terminated at any time by either the Investment Bank or the Company upon written notice thereof to the other party without liability or continuing obligation on the part of the Company or the Investment Bank; provided, however, that the Investment Bank will continue to be entitled to the full amount of any compensation payable pursuant to section [ ] above in the event that any of the events specified therein occurs prior to the expiration of [18] months after any termination of the Investment Bank’s engagement hereunder; and provided, further, that sections [ ] through [ ] and [Indemnification ]Annex attached hereto, shall survive any termination of the Investment Bank’s engagement hereunder.

41

• 42 -

The Engagement Letter

Indemnity and related obligations

• Clients are required to agree to customary forms of

indemnification, contribution, expense reimbursement and exculpation/release provisions. Often these obligations are set forth in an annex or schedule attached to the engagement letter. These obligations survive any termination of the engagement.

The only exception to the Company’s indemnification obligations to, and exculpation/release of, the Investment Bank are losses that are finally judicially determined to have resulted from the willful misconduct [or bad faith] or gross negligence of the Investment Bank.

42

• 43 -

The Engagement Letter

Indemnity Sample Provision:

• Indemnification and Expense Reimbursement. The Company agrees to indemnify

and hold harmless the Investment Bank to the fullest extent permitted by law, from and against any and all losses, claims, damages, obligations, penalties, judgments, awards, and other liabilities (collectively, “Liabilities”), and will fully reimburse the Investment Bank for any and all fees, costs, expenses and disbursements (collectively, “Expenses”), as and when incurred, of investigating, preparing or defending any claim, action, suit, proceeding or investigation, whether or not in connection with pending or threatened litigation or arbitration, and whether or not the Investment Bank is a party (collectively, “Actions”) (including any and all legal and other Expenses in giving testimony or furnishing documents in response to a subpoena or otherwise), arising out of or in connection with advice or services rendered or to be rendered by the Investment Bank pursuant to the Agreement, the transactions contemplated thereby or the Investment Bank’s actions or inactions in connection with any such advice, services or transactions; provided, however, such indemnity agreement shall not apply to any portion of any such Liability or Expense that is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of the Investment Bank in performing its services under this Agreement. 43

• 44 -

The Engagement Letter

Release Sample Provision:

• Release. The Company agrees that the Investment Bank shall not have

any liability (including without limitation, liability for any losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses or disbursements) in contract, tort or otherwise to the Company, or to any person claiming through the Company, in connection with the engagement of the Investment Bank pursuant to this Agreement and the matters contemplated hereby, except where such liability is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of the Investment Bank. The Company further agrees that the Investment Bank shall have no responsibility for any act, omission or misstatement by the Company, the Target or any of their respective Representatives.

44

• 45 -

The Engagement Letter

Contribution Sample Provision:

• Contribution. In order to provide for just and equitable contribution, if a claim for

indemnification pursuant to this Annex A is made but is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and the Investment Bank, on the other hand, shall contribute to the Liabilities and Expenses to which the indemnified persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and the Investment Bank, on the other hand, or, if such allocation is determined by a court of competent jurisdiction to be unavailable, in such proportion as is appropriate to reflect other equitable considerations such as the relative fault of the Company, on the one hand, and of the Investment Bank

• n the other hand. The Company agrees for purposes of this paragraph that the relative

benefits to the Company and the Investment Bank of any contemplated Transaction (whether or not consummated) shall be deemed to be in the same proportion as the total value paid or issued or contemplated to be paid or issued to or by the Company or its stockholders in connection with such Transaction bears to the fees actually paid to the Investment Bank under the Agreement. Notwithstanding the foregoing, the Investment Bank shall not be obligated to contribute any amount pursuant to this paragraph that exceeds the amount of fees previously received by the Investment Bank pursuant to the Agreement.

45

• 46 -

Engagement Letter

Indemnification and Release Selected Discussion Topics

Rationale for indemnification and exculpation other than for losses finally determined to have resulted from bad faith or gross negligence

46