6 legal presentation

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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m

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Navigating the Legal Process in an Insurance Agency M&A Transaction

JOHN P. CORRIGAN

CORRIGAN & BAKER, LLCWWW.CORRIGANBAKER.COM

Stan KinnettChief Corporate Counsel

www.assuredptr.com

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Stan Kinnett - Background

• Joined�AssuredPartners�at�its�inception�in�2011• Chief�Corporate�Counsel�

Acquisitions Debt�&�Equity�Financing Corporate�Matters

• In-house�counsel�with�two�national�insurance�agencies• Over�100�M&A�transactions�in�the�insurance��

intermediary�industry• 3�years�of�primarily�sell-side�M&A�work• P&C�License�and�AAI

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Background – John P. Corrigan

• Managing Member, Corrigan & Baker, LLC (2003 to present)• Founding member of The Breakwater Group, LLC (1996-2003)• Vice President, Secretary and Tax Counsel, White River Corporation (1991-1996)• Assistant Tax Director and Tax Counsel, Frank B. Hall & Co., Inc. (1989-1991)• Senior Tax Manager, Deloitte & Touche, LLP (1982-1989)

• Juris Doctor, Fordham University School of Law • M.B.A. (Accounting), cum laude, Pace University• B.B.A. (Accounting), cum laude, Pace University• Achieved professional licenses of CPA, CFP and CVA• New York State Bar Association, Member • Connecticut Bar Association, Member • American Institute of Certified Public Accountants, Member

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Critical aspects of all transactions:

The importance of a Nondisclosure and Confidentiality Agreement (“NDA”)

The importance of a Letter of Intent (“LOI”)

What to expect following the LOI moving towards an ultimate closing of the transaction

Why some deals fall apart in due diligence and how to effectively navigate this process

The art of financing the deal which is as important as the agreed purchase price

Minimizing corporate and/or personal income taxes and the techniques used

Drafting an appropriate purchase and sale agreement to protect each party’s interests

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BUYER’S OBJECTIVES:

Purchase a profitable company as inexpensively as possible

Reduce upfront cash requirement as much as possible

Deferred Purchase Price

Tax treatment = prefer treatment as compensation

Earnings = prefer treatment as purchase price

Easily fold business acquired into existing business (unless new platform)

Find great operators and leaders to join the team.

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SELLER’S OBJECTIVES:

Get maximum FMV for the company

Minimize income taxes paid on the sales proceeds

Make sure any deferred purchase price is not taxed as W-2/1099

compensation

Minimize potential for future reduction of purchase price for loss of

revenues

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Asset or Stock Purchase Agreement

Asset Deal (APA) Stock Deal (SPA)

Tax favorable to Buyer Tax favorable to C-corp Seller

Buyer only assumes listed liabilities Buyer assumes all liabilities

Buyer must obtain licenses Licenses transfer with business

Consent to assign key contracts Generally contracts transfer with business

Employees must sign or transfer agreements

Employment agreements continue

Most transactions in this industry Larger transactions, ESOP-owned agencies

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OK - Let’s Do A Deal

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Legal ProcessTimeline

NDA

Term Sheet / LOI

Legal Due Diligence

Negotiate Purchase

Agreement Terms not covered in

Term Sheet

Negotiate Employment Agreements & Ancillary

Docs

Prepare Disclosure Schedules

to APA/SPA

Finalize All Docs

Closing & Post-Closing

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Legal ProcessNDA / Confidentiality Agreement

• Protect your information

• Protect your people (within reason) Limit to people the Buyer will interact with during the process

Should not prohibit Buyer from hiring employees that respond to general advertisements, etc.

• Protect your clients (within reason) Should only limit Buyer from using Confidential Information to solicit

clients

Should not limit fair competition that is already taking place

• Mutual – Buyer’s information should also be protected

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Legal ProcessTerm Sheet / Letter of Intent

• Non-Binding v. Certain Binding Provisions

Exclusivity Period

Due Diligence Process (Access / Timing)

• Non-Purchase Price Provisions – Include?

Indemnification

Closing Conditions

Representations and Warranties

• Involving outside counsel

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Financing – Types:

All Cash Due at Closing

Cash Down Pmt. (“CDP”) + Prom. Note

CDP + Prom. Note + Formula Earn-Out

CDP + Equity (restricted stock, options)

All Equity Deal

Employment Agreement (multi-year)

CDP + Debt Assumption

Escrow Holdback

Combination of Above

Personal or parent company guarantees

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Legal ProcessLegal Due Diligence

• Clean Title Liens related to bank debt – payoff letter, lien release

Producer ownership or interest in book of business

Co-broker servicing deals (book not owned)

• Corporate Housekeeping

• Ongoing Litigation

• Employment Agreement Issues Severance / Change-In-Control Payments

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The Purchase Agreement

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Elements of a Purchase Agreement

Definitions of Purchased Assets vs. Excluded Assets

Purchase Price; Form of Payment; Tax Allocations

Assumed Liabilities vs. Excluded Liabilities

Forms of Consideration (Earn-Outs, Promissory Notes, Bonuses)

Restrictive Covenants


Conditions to Close

Accounting Cut-offs and Post-Closing Obligations

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The Purchase AgreementRestrictive Covenants

Confidentiality and Trade Secrets

Non-competition with buyer’s business (how broadly defined)

Geographical radius and period of time

Non-solicitation (employees, customers, vendors)

Non-disparagement

Equitable Relief/Injunctions

Joint vs. Several liability for breaches

Potential Cross-Default Provisions

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The Purchase Agreement


30 Common Reps and Warranties – all negotiable

Unconditional vs. to Best of Knowledge limitation

Joint and several Reps and Warranties or just several

Financial Statements audited/unaudited

Pending litigation and/or potential claims

Intellectual Property (trademarks, copyrights, patents)

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Legal ProcessDisclosure Schedules to the Purchase Agreement

• Purpose Asset Deal – List Assets Being Acquired and Liabilities Assumed

Exceptions to the Representations and Warranties

Confirms Due Diligence – Often Repetitive

Keep files from due diligence to populate schedules

Miscellaneous Items

• Preparation Seller’s responsibility

Outside counsel should lead the charge [$$$]

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The Purchase AgreementIndemnification

• Typical positional arguments Sellers will attempt to limit with baskets and caps

Buyers want Sellers to stand behind the business

• Acquisitive Buyers place significant value on consistency and fairness.

• Should be rare - we are insurance agents, after all.

• If both parties have experienced M&A counsel, this section should not be a difficult hurdle.

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Legal ProcessPrincipals / Owners Employment Agreements

• Compensation / Benefits

• Length of Term

• Definition of “For Cause” Termination

• Good Reason Concept

• Restrictive Covenants Term and Nature of Restrictions

Relationship to Non-Compete in Purchase Agreement

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Other Miscellaneous Clauses

Governing State Law & Venue for disputes

Arbitration vs. court intervention

Award of attorney fees to prevailing party

Rights to Assign contract

Rights to Terminate Agreement prior to Closing

Notice

Severability

Expenses (including broker fees)

Indemnification

Liquidated Damages

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Other Considerations

Is Buyer assuming the office/warehouse lease; landlord consent needed?

Is the LL one or more owners of real estate used in business?

Is Buyer going to assume all accrued paid time off liability for employees?

Are buyer’s employee benefit plans better or worse?

Are all employees getting re-hired by buyer?

Who is issuing employee termination letters with COBRA notices, etc.

[coordinate w/ buyer H/R rep.]

Will buyer/seller be managing outstanding A/R?

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Legal ProcessFinalize All Documents / Closing

• Scheduling Closing Owners must return from vacation for at least a day or two

Employees will need to sign

Simultaneous sign and close v. Signing with delayed closing

• Closing Remotely v. In Person

• Hyper focus on minute details Let your counsel guide you and bear most of this burden

Better to be correct than fast

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Closing the Deal Conditions precedent satisfied or waived

Bill of Sale/Stock Certificates

Assignment Agreement

3rd Party Consents and/or Waivers

Attorney Opinion

Escrow Agreement (for holdback)

Shareholder/B.O.D. Resolutions

Bank checks/wire transfer confirms

Swap Signature Pages

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Working With Your M&A CounselOur Process at AssuredPartners

• Communicate early and often

• At least one in-person meeting with attorneys if at all possible

• Legal process should move in step with the financial due diligence process

• 2 in-house attorneys and 2 corporate paralegals focused primarily on acquisitions

• Hire a deal lawyer!

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Questions & Answers