Private Company M&AThe Deal Doesn’t End at Closing
Mark VogelManaging Director
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as oftoday, by and among Company A, a Delaware corporation ("Parent"), Company B, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), Company C, a Delaware company ("Company"), and _______________________________, as Shareholder Representative (the ”Shareholder Representative").
RECITALSWHEREAS, the Board of Directors of Parent has approved, and deems it
advisable and in the best interests of its stockholders to consummate, the merger (the "Merger")of Merger Sub with and into the Company, upon the terms and subject to the conditions set forthherein; and
WHEREAS, the Board of Directors of the Company (the "Company Board"),having carefully considered the long-term prospects and interests of the Company and itsstockholders and determined that the Merger is advisable and that it is in the best interest of itsstockholders to consummate the transactions contemplated hereby, has approved the transactionscontemplated hereby and has resolved to recommend to its stockholders the adoption of thisAgreement, upon the terms and subject to the conditions set forth herein; and
WHEREAS, an irrevocable action by written consent of Company Stockholderssufficient to adopt this Agreement and to consummate the transactions contemplated hereby inaccordance with the provisions of the Delaware General Corporation Law ("Delaware Law")Delaware Law and, if applicable, the California Corporations Code (the "Corporations Code
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as oftoday, by and among Company A, a Delaware corporation ("Parent"), Company B, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), Company C, a Delaware company ("Company"), and _______________________________, as Shareholder Representative (the ”Shareholder Representative").
RECITALSWHEREAS, the Board of Directors of Parent has approved, and deems it
advisable and in the best interests of its stockholders to consummate, the merger (the "Merger")of Merger Sub with and into the Company, upon the terms and subject to the conditions set forthherein; and
WHEREAS, the Board of Directors of the Company (the "Company Board"),having carefully considered the long-term prospects and interests of the Company and itsstockholders and determined that the Merger is advisable and that it is in the best interest of itsstockholders to consummate the transactions contemplated hereby, has approved the transactionscontemplated hereby and has resolved to recommend to its stockholders the adoption of thisAgreement, upon the terms and subject to the conditions set forth herein; and
WHEREAS, an irrevocable action by written consent of Company Stockholderssufficient to adopt this Agreement and to consummate the transactions contemplated hereby inaccordance with the provisions of the Delaware General Corporation Law ("Delaware Law")Delaware Law and, if applicable, the California Corporations Code (the "Corporations Code
Private Equity and Venture Capital Exits
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• Post-closing purchase price adjustments• Income and sales tax issues• Indemnification claims• Escrow management• Employee compensation and
management carve-outs• Earn-outs• Administration and shareholder communications
Post-Closing Challenges
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Post-Closing Purchase Price AdjustmentsAdjustment Metrics*
* 42% of the post-closing purchase price adjustments in this Study were based on more than one metric; for example, both a Working Capital and Debt adjustment, or both a Working Capital and Closing Cash adjustment.
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Avoiding Working Capital Disputes
• Information and Time Disadvantages• Required Specificity
– Non-cash items– Taxes– Accounting principles
• Second Bite at the Apple• OSI vs. Instrumentarium
– Challenges to principles used should be brought as indemnification claim
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Tax Obligations and Rights
• Income Taxes– Treatment of Closing Costs– Disqualifying Dispositions of Options– Final year estimated taxes– NOLs – who gets the benefit– Impact on working capital
• Obligations for tax return preparation– Buyer should be responsible with shareholder
rep approval
• Sales and use taxes– Easy for buyers to make claims
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Post-Closing IndemnificationWhat do Buyers Claim?
* Note: Percentage drops to 5% if two large WC claims eliminated** Buyers that brought fraud claims in sampling did not specify amounts of damages.
Average Claim Size as Percentage of Escrow
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Timing of Claims
• 20% of claims received during the last week of the escrow period
• On average, third-party claims come early, direct claims come late
• The average time from claim notification to resolution was 8 months
• Methods of Resolution:– 44% of claims were settled individually– 50% of claims were part of global settlements– 6% of claims were eventually withdrawn by the buyer– No claims went to a verdict or arbitration decision
(although several advanced to litigation or arbitration)
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Deterrents to Indemnification Claims
• Are you prepared to mount a defense if needed?– Establish a meaningful expense escrow– Select a responsible shareholder rep– Focus on limitations in contract – caps, baskets,
time limits
• Pre-closing preparation– Due diligence in order– Clean up issues before closing
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Escrows/Holdbacks
% of Transaction Value
These periods apply to representations and warranties generally; specific representations and warranties are often carved out from these periods.
12 to 24 Month Escrow Periods
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Escrow Releases• Fighting Frivolous Claims
– Define what constitutes a claim (when dormant, accruals, etc.)– Assumption of defense, payment of fees– Expense fund
• Automatic release of the escrow fund – pros and cons• Don’t run payments through any party other than
Buyer or a Bank– Risk if money were to disappear– Risk if payer is insolvent or bankrupt– Be aware of administrative burden if you agree to make these
payments as the shareholder representative
• Escrow Economics– Pay attention to the fees. The banks will often waive them.– Consider no disbursements under $X. It costs more to send them than the amount.– Tax treatment of interest (if you’re earning any)
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Exposure of the Shareholders Post-Closing
• Is your liability capped at the escrow amount?– Risk of clawbacks
• If not, consider tradeoffs– More escrow in exchange for a
cap– Representation and warranty
insurance– Establish a meaningful expense
fund– Deter indemnification claims– Ensure all shareholders are
contributing their pro rata
Liability Cap Carve Outs
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Employee Compensation andManagement Carve-outs
• Merger Consideration as Compensation– Escrow release may be compensation, too.
– Often need to run through Buyer’s payroll
– Taxable at closing or when paid?– Employment tax issues post-closing
– Make clear who pays matching contributions
• Effect on Working Capital and Taxes– Expensed or Capitalized?– Disqualifying Dispositions of ISOs
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Earnouts – What’s the big deal?
Period of Earnout
Earnout Metrics
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Mitigation of Earnout Disputes
• Avoid earnouts, if possible– Most heavily litigated area of M&A
• If this can’t be avoided, have an objective measurement of triggering event– Make it hard to manipulate– Avoid financial measurements, if possible– Keep it as simple as possible– Easy to measure (e.g. Phase II FDA approval is
better than $10M in net revenue)
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Administrative Tasks
• Ensure shareholders have received correct merger consideration
• Track all dates– Missing a response deadline – the biggest risk!
• Escrow statement reconciliation– Banks regularly make mistakes
• Investment oversight– Circumstances do change over 18-24 months
• Shareholder inquiries– When, how much, claims status, audit
confirmations
• Amendments
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Should You Take on the Role of Shareholder Rep?
• Advantage – control• Disadvantages
– Time commitment can be overwhelming– Tedious admin work– Limited access to qualified staff and info– Rep can’t focus on core business– You’re usually an island (contrast with
serving on the Board pre-close)• Issues to be considered by potential
Rep– Acceptable risk? – D&O – are you covered?– Conflicts & independence – for whom do
you work?
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...Or Use an Outside Professional?
• Professional independent management• Diverse expertise• Allows for best use of time• Avoid risk & conflicts• Transparency• Improved shareholder communication• Rep can’t easily quit
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The SRS Process
• Review Documents and Submit Proposal– Fee based on anticipated amount of work required and perceived
risk– Deal size, no. of shareholders, working capital, earn outs, etc.
– Typically 2-10 basis points on deal size (minimum fee of $35k)
• Submission of limited comments• Negotiation of engagement agreement including contractual
rights of significant shareholders to oversight and direction• Execution of merger documents• Serve as Rep until nothing left to be done
– Everything we do is included in our fee, but not 3rd party expenses– SRS serves as agent but we always make clear we are NOT a law
firm and do NOT provide legal advice
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SRS at a Glance
• Organized in 2007 to address pain point in M&A deals– VCs repeatedly complaining about shareholder rep role
• Since formation, over 100 M&A deals with over $10B in value– More experience than anyone else, even large funds– Represent over 10k shareholders including 400 of the largest VCs– Shareholders in 44 countries
Professional Independent Experienced
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Menlo VenturesMeritech Capital Partners Mobius Venture Capital Mohr, Davidow Ventures Norwest Venture Partners Oak Investment PartnersRedpoint Ventures Saints CapitalSequoia Capital Silicon Valley Bank SOFTBANK Capital Steamboat Ventures Summit Partners TPG CapitalTrident Capital U.S. Venture PartnersVenrock Versant Venture Management Worldview Technology Partners
Accel Partners ARCH Venture Partners August Capital Austin Ventures Bessemer Venture Partners Boulder VenturesCharles River Ventures CMEA VenturesCW Ventures First Round Capital Foundation CapitalGranite Ventures Greylock Partners H&Q Healthcare Investors Highland Capital Partners Institutional Venture Partners Integra Ventures Kleiner Perkins Caufield & Byers Mayfield Fund
Representative Clients
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Representative Transactions
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San Francisco Silicon Valley Denver
415.367.9400 650.648.9550 303.648.4085
Mark [email protected]
Contact Information