Certified Merger & Acquisition Advisor Credentialing Program

11

Certified Merger & Certified Merger & Acquisition Advisor Acquisition Advisor

Credentialing Credentialing ProgramProgram

20082008Loyola University ChicagoLoyola University ChicagoMergers and Acquisitions:Mergers and Acquisitions:

Legal ConsiderationsLegal Considerations

Presented By:Presented By:G. William HubbardG. William Hubbard

Phone: (312) 704-3624Phone: (312) 704-3624Email: [email protected]: [email protected]

22HUBBARD BUSINESS COUNSELHUBBARD BUSINESS COUNSEL

Faculty MemberFaculty Member

G. William HubbardG. William HubbardHubbard Business CounselHubbard Business Counsel222 N. LaSalle St., Suite 300222 N. LaSalle St., Suite 300Chicago, Il 60601Chicago, Il [email protected]@hbcounsel.com

For over 25 years Bill has helped guide clients in the decisions involved with For over 25 years Bill has helped guide clients in the decisions involved with buying, growing, and selling—and financing—companies and the structuring buying, growing, and selling—and financing—companies and the structuring (including tax structuring), pricing, and negotiating of these transactions. (including tax structuring), pricing, and negotiating of these transactions. Amongst others, the industries in which he has represented clients include: Amongst others, the industries in which he has represented clients include: Manufacturing, Technology, Software, Distribution, Service, Banking, Financial Manufacturing, Technology, Software, Distribution, Service, Banking, Financial Services, Publishing, Construction, Automotive, Mining, Oil and Gas, Real Services, Publishing, Construction, Automotive, Mining, Oil and Gas, Real Estate, Entertainment and Health Care.Estate, Entertainment and Health Care.He is a member of the American Bar Association Section of Business Law—He is a member of the American Bar Association Section of Business Law—Mergers and Acquisitions and Limited Liability Companies Subcommittees, Mergers and Acquisitions and Limited Liability Companies Subcommittees, past Co-Chair of the Business Law Subcommittee on Mergers and Acquisitions past Co-Chair of the Business Law Subcommittee on Mergers and Acquisitions of the Chicago Bar Association, past Chair of the Illinois CPA Society Mergers of the Chicago Bar Association, past Chair of the Illinois CPA Society Mergers and Acquisitions Special Interest Group Task Force, and is a member of the and Acquisitions Special Interest Group Task Force, and is a member of the Illinois CPA Society Consulting Services Executive Committee. Illinois CPA Society Consulting Services Executive Committee.


Amongst other professional activities, he authored two chapters for Mergers and Amongst other professional activities, he authored two chapters for Mergers and Acquisitions Handbook for Small and Midsize Companies, edited by West and Jones (New Acquisitions Handbook for Small and Midsize Companies, edited by West and Jones (New York: Wiley, 1997), co-authored a chapter on Illinois/Delaware/Nevada Corporations for an York: Wiley, 1997), co-authored a chapter on Illinois/Delaware/Nevada Corporations for an IICLE handbook, authored the Limited Liability Company Management Structures chapter in IICLE handbook, authored the Limited Liability Company Management Structures chapter in the LLC and S Corporation Handbook (IICLE, 2008) and has made numerous presentations the LLC and S Corporation Handbook (IICLE, 2008) and has made numerous presentations concerning closely held businesses and mergers and acquisitions. He is a Past President concerning closely held businesses and mergers and acquisitions. He is a Past President and Board Member of the West Point Society of Chicago.and Board Member of the West Point Society of Chicago.

Bill, who is a C.P.A., graduated from the Illinois Institute of Technology Chicago-Kent Bill, who is a C.P.A., graduated from the Illinois Institute of Technology Chicago-Kent College of law (with high honors in 1978) and the United States Military Academy at West College of law (with high honors in 1978) and the United States Military Academy at West Point (1973)Point (1973)

Law and Politics Magazine in connection with Chicago Magazine has recognized Bill as one Law and Politics Magazine in connection with Chicago Magazine has recognized Bill as one

of Illinois’ Mergers and Acquisitions and Closely Held Business “SuperLawyers.” of Illinois’ Mergers and Acquisitions and Closely Held Business “SuperLawyers.” (“SuperLawyers are the top 5% of the attorneys in each state as chosen by their peers and (“SuperLawyers are the top 5% of the attorneys in each state as chosen by their peers and verified by our independent research. The list of Super Lawyers is based on surveys of verified by our independent research. The list of Super Lawyers is based on surveys of more than 47,000 lawyers across Illinois.”)more than 47,000 lawyers across Illinois.”)The Illinois Supreme Court does not recognize a lawyer's certifications or specialties, none The Illinois Supreme Court does not recognize a lawyer's certifications or specialties, none of which are requisite to the practice of law.of which are requisite to the practice of law.


Just Documenting a Just Documenting a Transaction?Transaction?

• What is Law? What is Law? • What is Business?What is Business?• Can they be separated? -- Cases on Can they be separated? -- Cases on

negotiations and legal considerations negotiations and legal considerations (privilege; errors and omissions)(privilege; errors and omissions)

• Does it matter for particular purposes? Does it matter for particular purposes?


I. Lawyer’s RoleI. Lawyer’s Role

A.A. Identify (and understand) the client, its Identify (and understand) the client, its business, and the various interests, value business, and the various interests, value propositions and riskspropositions and risks

• Lawyer does not represent “the deal”Lawyer does not represent “the deal”• Lawyer represents either the buyer or the Lawyer represents either the buyer or the

seller (or sometimes the intermediary) in the seller (or sometimes the intermediary) in the dealdeal


B.B.Quarterback the dealQuarterback the deal• Identify key business, financing, legal and tax issues Identify key business, financing, legal and tax issues

early; avoid surprisesearly; avoid surprises• For each particular deal, determine the specific For each particular deal, determine the specific

value propositions and the risks; no deal is risk free value propositions and the risks; no deal is risk free • Focus depends on whether lawyer is representing Focus depends on whether lawyer is representing

the buyer or the seller (or the intermediary)the buyer or the seller (or the intermediary)• Structure the deal (client, intermediary, CPA, other Structure the deal (client, intermediary, CPA, other

side)side)• Manage the process and the mechanics—and the Manage the process and the mechanics—and the

interpersonal dynamics--of the dealinterpersonal dynamics--of the deal


C.C. Seller’s CounselSeller’s Counsel Prepare Client for the Process of the Deal: Prepare Client for the Process of the Deal: Emotions and TimingEmotions and Timing

• Assist in preparing client for the process and Assist in preparing client for the process and coordinate data room and due diligence periodcoordinate data room and due diligence period

• Review and negotiate the letter of intent (or Review and negotiate the letter of intent (or deal points), if applicabledeal points), if applicable

• Negotiate the acquisition agreementsNegotiate the acquisition agreements• Narrow representations and warrantiesNarrow representations and warranties• Allocate risk to the buyerAllocate risk to the buyer• Find, or collaborate on, solutions to close the Find, or collaborate on, solutions to close the

deal deal


D.D. Buyer’s Counsel Buyer’s Counsel • Quarterback the deal for the clientQuarterback the deal for the client• Conduct legal due diligence and coordinate Conduct legal due diligence and coordinate

other due diligenceother due diligence• Prepare and/or review and negotiate the Prepare and/or review and negotiate the

letter of intentletter of intent• Draft and negotiate the acquisition Draft and negotiate the acquisition

agreementsagreements• Widen representations and warrantiesWiden representations and warranties• Allocate risk to the sellerAllocate risk to the seller

• Find solutions to close the dealFind solutions to close the deal


II. Letter of IntentII. Letter of Intent

A.A. GeneralGeneral● Basic terms of the deal have been Basic terms of the deal have been

discussed by buyer and seller at this point; discussed by buyer and seller at this point; confidentiality agreementconfidentiality agreement

• Provides a roadmap for the transactionProvides a roadmap for the transaction• Customarily non-binding except for certain Customarily non-binding except for certain

protective covenantsprotective covenants • When to be used; likely effectsWhen to be used; likely effects• Exclusivity during negotiationExclusivity during negotiation


B.B. Framework of the deal Framework of the deal • Purchase price/Adjustment to purchase price Purchase price/Adjustment to purchase price • Working CapitalWorking Capital• Payment terms Payment terms • Closing dateClosing date• Assets being purchased and liabilities being Assets being purchased and liabilities being

assumed (asset purchase transaction)assumed (asset purchase transaction)• Refundable/Nonrefundable depositRefundable/Nonrefundable deposit• Specific conditions to be satisfied prior to (or post) Specific conditions to be satisfied prior to (or post)

closingclosing• Third party consentsThird party consents• FinancingFinancing• Performance of BusinessPerformance of Business


B.B. Framework of the deal (continued)Framework of the deal (continued)• Ancillary agreementsAncillary agreements

• Escrow agreementEscrow agreement• Employment agreementsEmployment agreements• Consulting AgreementConsulting Agreement• Covenants not to competeCovenants not to compete• Seller financing agreementsSeller financing agreements• Lease/LicenseLease/License• Indemnification agreementIndemnification agreement

• Conduct of the business prior to closingConduct of the business prior to closing• Expenses/BrokersExpenses/Brokers• Public announcements; disclosure of the terms of Public announcements; disclosure of the terms of

the dealthe deal


C. Protective covenants are bindingC. Protective covenants are binding● Right to have access to the seller’s business Right to have access to the seller’s business

and books and recordsand books and records• Confidentiality obligations Confidentiality obligations • ““No Shop” Restrictions for a certain period of No Shop” Restrictions for a certain period of

timetime• Break up fees Break up fees


III.III. Legal Aspects of The Deal Legal Aspects of The Deal StructureStructure

A. Stock SaleA. Stock Sale• All assets are (usually) included All assets are (usually) included • All liabilities are (usually) included (known All liabilities are (usually) included (known

and unknown, contingent or otherwise)and unknown, contingent or otherwise)• Due diligence, representations and Due diligence, representations and

warranties, and indemnification protections warranties, and indemnification protections are criticalare critical

• Generally no issues with assignment of critical Generally no issues with assignment of critical contracts (other than “change of control” contracts (other than “change of control” issues)issues)


B. Asset SaleB. Asset Sale• Sale by the corporation of some or all Sale by the corporation of some or all

its assets and the assumption by the its assets and the assumption by the buyer of certain liabilities buyer of certain liabilities

• Ability to sell less than all the assets Ability to sell less than all the assets • Ability to limit the assumed liabilitiesAbility to limit the assumed liabilities


B. Asset Sale (continued)B. Asset Sale (continued)• Certain liabilities may follow the assets even if Certain liabilities may follow the assets even if

not expressly assumednot expressly assumed• Tort liabilitiesTort liabilities• Tax liabilitiesTax liabilities• Environmental liabilitiesEnvironmental liabilities• Product liability Product liability • Warranty liabilitiesWarranty liabilities• International trade rules,International trade rules, custom, trade cartel, custom, trade cartel,

dual use technologiesdual use technologies• Specific statutory liabilities (Specific statutory liabilities (e.g. e.g. duty to bargain)duty to bargain)• Bankruptcy – fraudulent conveyance; 363; 11Bankruptcy – fraudulent conveyance; 363; 11


C. Section 338(h)(10) Election in a Stock SaleC. Section 338(h)(10) Election in a Stock Sale● Treats the selling entity and the buyer as if an Treats the selling entity and the buyer as if an

asset sale occurred even though a stock sale asset sale occurred even though a stock sale occurredoccurred

● Only the buyer and the selling entity are Only the buyer and the selling entity are taxed as if an asset sale occurredtaxed as if an asset sale occurred

● Election is made in order to step up the basis Election is made in order to step up the basis of the selling entity’s assets in a stock saleof the selling entity’s assets in a stock sale


D. Consideration D. Consideration ● All cash up frontAll cash up front● Deferred purchase priceDeferred purchase price● Stock as a portion of the purchase priceStock as a portion of the purchase price● Seller financingSeller financing

• Subordinated security interest in the Subordinated security interest in the purchased assetspurchased assets

• Pledge of stock in stock purchasePledge of stock in stock purchase• Personal guaranties Personal guaranties


16.16. What kind of basket on indemnification What kind of basket on indemnification is there, and how big? is there, and how big?

• What is a basket?What is a basket?• Creates a safety net so that the Seller will not Creates a safety net so that the Seller will not

have to pay damages in smaller amounts for have to pay damages in smaller amounts for breaches of warranties and representations.breaches of warranties and representations.

• Kinds of baskets.Kinds of baskets.• DeductibleDeductible

•. . .no liability until damages reach $50,000, and then . . .no liability until damages reach $50,000, and then only for the amount exceeding $50,000 . . . only for the amount exceeding $50,000 . . .

• Threshold.Threshold.•. . .no liability until damages reach $50,000, and then . . .no liability until damages reach $50,000, and then for the total of all damages. . . for the total of all damages. . .


16.16. What kind of basket on indemnification What kind of basket on indemnification is there, and how big? (continued)is there, and how big? (continued)

• Application of basket to specific warranties and Application of basket to specific warranties and representations (carveouts). representations (carveouts).

• Size of basket.Size of basket.• From American Bar Association Committee on From American Bar Association Committee on

Negotiated Acquisitions study on acquisitions of Negotiated Acquisitions study on acquisitions of private companies by public companies, most private companies by public companies, most less than $100 million.less than $100 million.

• 40% of deals had basket of ½% or less of 40% of deals had basket of ½% or less of purchase price.purchase price.

• 49% of deals had basket of ½% to 1% of 49% of deals had basket of ½% to 1% of purchase price.purchase price.

• Other studies indicate that smaller deals tend to Other studies indicate that smaller deals tend to have a basket with a higher percentage. have a basket with a higher percentage.


B. The Hart-Scott-Rodino Act (continued)B. The Hart-Scott-Rodino Act (continued)• Two TestsTwo Tests

• Size-of-the-Transaction testSize-of-the-Transaction test• securities and assets valued in excess of securities and assets valued in excess of

$212 million are being transferred$212 million are being transferred• Size-of-the-Person testSize-of-the-Person test

• one party has $100 million or more in one party has $100 million or more in annual net sales or total assets; andannual net sales or total assets; and

• one party has $10 million or more in one party has $10 million or more in annual net sales or total assets; and annual net sales or total assets; and

• securities and assets valued in excess of securities and assets valued in excess of $53 million are being transferred$53 million are being transferred


4.4. Bureau of Customs and Border Protection Bureau of Customs and Border Protection (f/k/a U.S. Customs Service)(f/k/a U.S. Customs Service)

• Import administration and enforcement Import administration and enforcement • 1930 Tariff Act 1930 Tariff Act • No ruling on penaltiesNo ruling on penalties


6.6. BIS, OFAC, DDTC, and CBP have announced BIS, OFAC, DDTC, and CBP have announced “off the record” that asset purchasers will “off the record” that asset purchasers will henceforth be held liable for any past violations henceforth be held liable for any past violations of the export or import regulations by the asset of the export or import regulations by the asset seller. Small companies typically receive fines seller. Small companies typically receive fines under $100,000. Large corporations, however, under $100,000. Large corporations, however, often receive much larger fines (or, more often receive much larger fines (or, more commonly, pay the monetary equivalent of commonly, pay the monetary equivalent of such fines in settlement of civil charges), such such fines in settlement of civil charges), such as the $25 million settlement extracted from as the $25 million settlement extracted from Raytheon Company in February 2003 for Raytheon Company in February 2003 for alleged violations of ITAR. alleged violations of ITAR.


X.X. Securities LawSecurities Law

A. GeneralA. General• ““Securities” definitionSecurities” definition

• StocksStocks• membership and partnership interestsmembership and partnership interests• options and warrantsoptions and warrants

• If the security is not exempt, then it must If the security is not exempt, then it must be registeredbe registered

• Either the securities themselves are Either the securities themselves are exempt or the transaction is exemptexempt or the transaction is exempt


Restatement (Agency)Restatement (Agency)

• Use of Principal’s Property; Use of Use of Principal’s Property; Use of Confidential InformationConfidential Information

• An agent has a duty An agent has a duty • not to use property of the principal for the not to use property of the principal for the

agent’s own purposes or those of a third agent’s own purposes or those of a third party; andparty; and

• not to use or communicate confidential not to use or communicate confidential information of the principal for the agent’s information of the principal for the agent’s own purposes or those of a third party. own purposes or those of a third party.

HUBBARD BUSINESS COUNSELHUBBARD BUSINESS COUNSEL


Duties of PerformanceDuties of Performance

• An agent has a duty to act in accordance with the express An agent has a duty to act in accordance with the express and implied terms of any contract between the agent and and implied terms of any contract between the agent and the principalthe principal

• Duties of Care, Competence, and DiligenceDuties of Care, Competence, and Diligence• Subject to any agreement with the principal, an agent has Subject to any agreement with the principal, an agent has

a duty to the principal to act with the care, competence, a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in an agent are circumstances to be taken into account in determining whether the agent acted with due care and determining whether the agent acted with due care and diligence. If an agent claims to possess special skills or diligence. If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally with the care, competence, and diligence normally exercised by agents with such skills or knowledge.exercised by agents with such skills or knowledge.


Duties of LoyaltyDuties of Loyalty

• Material Benefit Arising Out of PositionMaterial Benefit Arising Out of Position• An agent has a duty not to acquire a material benefit from An agent has a duty not to acquire a material benefit from

a third party in connection with transactions conducted or a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position.through the agent’s use of the agent’s position.

• Acting as or on Behalf of an Adverse PartyActing as or on Behalf of an Adverse Party• An agent has a duty not to deal with the principal as or on An agent has a duty not to deal with the principal as or on

behalf of an adverse party in a transaction connected with behalf of an adverse party in a transaction connected with the agency relationship.the agency relationship.

• CompetitionCompetition• Throughout the duration of an agency relationship, an Throughout the duration of an agency relationship, an

agent has a duty to refrain from competing with the agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise principal and from taking action on behalf of or otherwise assisting the principal’s competitors. During that time, an assisting the principal’s competitors. During that time, an agent may take action, not otherwise wrongful, to prepare agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency for competition following termination of the agency relationshiprelationship

Documents

Certified Merger & Acquisition Advisor Credentialing Program