Robert T. Miller: Mergers and Acquisitions Outline Spring 2013
Companies merge for various reasons. A good economic reason is value creation, but there are bad motives too:
o Example: One asset is worth $100, and another worth $50, but together they may be worth $200. This is value creation.
– Increasing the size of the business opens up new opportunities.
o Example: CitiBank pioneered ATMS, but wouldn’t have been able to do so if it wasn’t large enough. The ATM would not have been profitable at a small bank. The easiest way to grow is to effect a merger. àOrganic company growth is difficult.
Two types of buyers: (1) Strategic buyers, (2) Financial buyers
– Strategic Buyers:
o These are operators (like Microsoft) that want to acquire other companies to integrate into their business
– Financial Buyers:
o These are private equity funds. They purchase companies, change them and improve them, and then resell them at a higher price
– Often the seller is a private owner who is reaching retirement. They can take it public or sell it privately. Most often they sell it privately, because if they go public, the public often wants you to stay and run the company.
– Sometimes companies are just in financial distress. They can either go through bankruptcy or sell their own company to a larger one.
II. Stock Purchases
The deal in the Stock Purchase Agreement (S1-5) is the simplest M&A deal.
– This is a private company (you can tell because it has just one shareholder).
o Cash only purchase.
§ Because this is a cash deal, you are not selling any securities like a stock deal. If you were dealing with stock you would have to deal with the Securities Act.
First duty as an M&A lawyer for the Acquirer: send the Preliminary Due Diligent Request.
– At the beginning of the deal there is an Information Asymmetry problem:
o The Target company already knows everything about itself. The acquirer does not, and is afraid of any dirty secrets of the Target (liens, bad debt, liabilities, litigation).
o There will be legal, accounting, financial, and business due diligence.
§ How do products and technology work? Meshing two cable companies can be a mess. Advertising might butt heads, etc.
First duty as an M&A lawyer for the Target: after receiving the due diligence request, send a Confidentiality Agreement before sending any information (S1-2):
– The Target could choose not to give any information, but this won’t result in a high offer from the Acquirer, if there is an offer at all. So the Target will send information
– Danger in sending information is that now another party has your secrets. This is even more dangerous when the Acquirer is a strategic acquirer.
o Mainly worried about junior business people getting the information. Senior people know not to abuse the information, but juniors don’t have the same perspective
– Danger in the information going public: now your employees know they might lose their jobs, you might lose customers, etc.
o Mistakes in Confidentiality Agreement (S1-2):
§ §2: Says that all copies of financial information needs to be returned; but that is impossible to enforce
§ Don’t use language like “immediately” because that is nearly impossible to fulfill.
· Instead say “within two weeks” or a specified reasonable amount of time
§ Don’t use language of just “best efforts”
· In New York, “best efforts” means you burn the house to catch a mouse
o Instead use “reasonable efforts” or include “without incurring additional financial burdens”
Confidentiality agreement should say the information can be used for the SOLE reason of evaluating the company. The remedy to a breach of this agreement is a Preliminary Injunction (“PI”).
Causes of action:
– For fraud (tort) you need to show: (1) Representation, (2) False, (3) Scienter, (4) Reliance, (5) Harmed
o Remedies: expectation damages
– For contractual misrepresentation you need to show: (1) Rep, (2) False, (3) Material, (4) Harmed, (5) Reasonable reliance
o Remedies: Rescission
RAA Management v. Savage Sports Holdings (S1-3): RAA sought to buy Savage Sports, and after performing some due diligence they found that SS had not disclosed 3 large liabilities that killed the deal. The Non-Disclosure Agreement stated that the seller (SS) would have no liability for any representation made in the due diligence report for the buyer. The Agreement also said that any claims based on due diligence would be limited to a claim arising from a completed transaction.
– Rule: Contracts like this will be interpreted strictly by the language on the contract. Here the contract said that the seller would not be liable for any reps made in due diligence.
o This avoids future costly litigation. The parties are sophisticated and should contract for any protection they want. Furthermore, RAA is the real liar here as they agreed there would be no liability, but now try to sue for liability. To accept RAA’s argument, there would be a lawsuit any time a potential merger/acquisition fell through because the buyer was unsatisfied.
– Rejected claims based in contract and tort. Even if SS intentionally misled RAA, liability was contracted out of the due diligence disclosure.
o Note: You can disclaim misrepresentations OUTSIDE of the contract, but you CANNOT disclaim misrepresentations INSIDE the contract.
Best Buy Confidentiality Agreement (S1-4):
– Miller says it is the weirdest confidentiality agreement he has seen
– It seems like Best Buy is REQUIRED to give Schulze (the buyer) certain information
o §4(c): “Required Information” and that “the Company will provide you” which makes it sound like Best Buy has an obligation to provide additional information that is “reasonably necessary” to make a Qualified Offer.
§ But then look at §6: No Obligation. This seems to takeaway whatever was given in §4(c).
– Stand-Still §2:
o The first section is normal. In a normal Standstill it would say: “for (x) years you won’t attempt to overtake the company”
§ However, Best Buy’s agreement has more weird shit:
· §2(c)(ii): If Schulze makes a Qualified Offer (defined in §5) and it is rejected, he may make an off
rovision. We know what the company was like at the last reported balance sheet, but the Buyer wants a warranty that no MAC has occurred since then.
– §2.18: Contracts and Commitments
o (b):Securities law Filing Requirement. For large companies, there are not many material contracts (might seem counterintuitive). The reason is that the bigger you are, the less each individual contract means. If Google loses $10 million in a transaction, it’s no big deal.
o What is “material”? à”Whatever ‘material’ means is certainly relevant to the context”
§ Basically, we don’t know how to define material. If you are deciding what documents to include for material disclosures, you want to be over-inclusive. It is less risky to include a borderline-material document than to not include it.
– Miller: in practice, the purchase price normally doesn’t change depending on how strong the reps and warranties are because the business people often know each other well and they agree on a price before the terms are negotiated. àThis makes this negotiation VERY important because it means that you can get favorable terms without having to pay for it.
– “Flat” vs. “Material” Reps:
o When the word “material” or some other qualifier is not included, it is called “flat”
o Some provisions should be flat:
§ §2.2: No subsidiaries
§ §2.5: Company has 200 shares outstanding
§ §2.6: No outstanding securities that are convertible to shares.
o §2.29 is a good example of when provisions should not be left flat. NFW! Clause.
§ This clause basically says that no rep/warranty that was made has been untrue, and they will remain true. No rep/warranty has omitted or will omit to state any fact necessary in order to make non-misleading reps/warranty.
· It is crazy for the seller to agree to this. This language is similar to 10(b)(5) of the Securities Act. 10(b)(5) requires scienter and reliance. Neither of which need to be shown in §2.29.
o Essentially §2.29 imports a fiduciary duty on the Seller, which they should not owe to the Buyer.
– §1.4: Escrow Account:
o Purchaser gives $1.825 million to the bank in an escrow amount.
§ This is to be given to the Seller at a point in the future, but can only be paid when the Purchaser gives permission
· This is done if the Purchaser is worried about the credit worthiness of the Seller in case Seller owes indemnity to Purchaser
· If the Buyer is the escrow agent, then the Seller takes on the credit risk of the Buyer àThey will only get paid if the Buyer is solvent.