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Merger and Acquisitions
University of Iowa School of Law
Miller, Robert T.

Mergers and Acquisitions Miller Spring 2017

What do M&A/transactional lawyers do?

Figure out what to do within the bounds of a contract to effect the business’s objectives

They use these contracts are to create value for both parties to the contract by finding ways to give rights to those who value them the most and giving risks to those who can bear them at the cheapest cost. ****

Practice pointers—creating value:

Seek voluntary cooperation as opposed to conflict (litigation). People get rich by working together.
Watch out for over-lawyering a deal. If the price is right, you can live with anything else.
Determine where the real value in a deal lies (i.e. where real money is)

Give up on things that won’t benefit you anyways.
Try to increase the total joint value.
Ex. In an advertising agency, the real assets are in its people. An oil company, its hard assets. Focus on those things.

The worst person to negotiate with is someone junior because they don’t know what they can give up and the answer to everything is no.

Buy side Process:

Starts with due diligence–buyer (or seller also in a stock for stock deal) needs to know what he’s buying to determine whether to buy it and how to price it

This process helps overcome the information asymmetry between buyer and seller.

2 categories of buyer – strategic and financial buyers.

Strategic are other operating companies—they will integrate the target into their existing business. Ex. Gillett and P&G combination –wider product offering and wider market.

Strategic buyers tend to know more about their intended target.
Synergy – strategic buyers look for this to create more value together than apart. The most important aspects are operation synergies as opposed to shared costs. Ex. Big pharma company with FDA and marketing experience combining with small pharma that just created a new product.
More likely than financial buyers to pay in stock.

Financial buyer —tune the target up and sell it off for a profit. Ex. Private equity fund.

Have a bigger problem with information asymmetry.
Typically will pay in cash/debt.

Confidentiality Agreements Generally

The sample confidentiality agreement online is a cash deal because the agreement is one sided concerning confidentiality (a mutual nondisclosure agreement would say something like the disclosing party)
Potential issues:

A buyer operation level employees taking advantage of your opportunities because they don’t make their living on confidential information.
Breach of the contract is also hard to detect. This is a paradigm specific performance agreement. “seller shall be entitled to specific performance.”, i.e. ceasing the dissemination of confidential information.

As a result, a seller should only sign a confidentiality agreement with a buyer if it trusts the other side and a deal is likely to happen.

Sample Confidentiality agreement

Section 2. can force other side to give back confidential info (alternatively could have it destroyed)

In negotiations, to determine whether you can give something up, you should ask “what is the added risk?”

With destroying vs returning, the risk is the same, i.e. that they keep your confidential information.

Another possibility is that they want to keep a single copy, usually for litigation purposes.

Have it kept with that companies outside counsel. These law firms rely on repeat players so they wouldn’t be giving out confidential info. (“gatekeeper” function and reputational interest).

Section 3. “immediately” is a dangerous word. “reasonable” could be too much. “promptly” could be ok.
Contractual obligation – what does “best efforts” mean?

In certain situations, you can’t obligate the other party to do something outside of their control but only obligate them to try.
Best efforts in New York is a crazy high standard – “burn down the house to catch the mouse”
Look to case law for how courts interpret these boilerplate phrases
Other examples include “commercially reasonable efforts”

Section 5 – “no reps and warrantees of any nature”—this language is used because no business has perfect records (all cost balancing w.r.t. error reduction).
Section 6 — If the dealt doesn’t go through, the other side may try to recruit your best talent out of your company using the info it collected in due diligence.

(the other side will likely fire all of the bad employees of the target if the deal does goes through.)
Negotiations: solicitation vs. just coming to them. Prof suggestion—could limit it to certain people. Could allow that general solicitation that attract those specific employees is ok or that a headhunter finding them being ok as well.
Analogy to asking someone on a date – problem of proof with who asked who. Sometimes also, someone makes it clear they want to be asked out without saying so much
Negotiations: Agents of the other side are not parties to the agreement. But the seller will want the buyer to be responsible for breaches of this agreement by his representatives.

Buyer would counter that he has no control other them, but this is the only way to protect against confidential information leaks by representatives, so try to get it included.

The representatives would never sign a confidentiality agreement themselves, and without one of these, there would be no remedy

Section 12 — Contracts are normally assignable so non-assignability is an absolute must to protect against assigning this NDA contract.

Also, the seller should include a provision that if the buyer tries, such purported assignment will be null and void (some states allow the assignment to go through anyways while assignor is still in breach, so need that second half as well to prevent this other negative contingency)

Section 14 – full integration clause. HAS TO ALWAYS BE THERE in an agreement, otherwise parol evidence could be an endless source of transaction costs

Partial integration – can bring in additional terms, i.e. parol evidence
Full—cannot bring in other evidence outside the four corners of the agreement. .
This provision (lower part) also allows two parties to each have a copy of the document so they can sign it and exchange those with each other via fax, etc.–also very important for practical purposes so both parties don’t have to be in the same room signing the same document


As a matter of contract interpretation, the plain language in the disclaimer/nonreliance provision at issue here included disclaiming liability even for intentional misstatements.

Court says RAA is the actual liar (lol) because they signed a contract saying they wouldn’t bring a claim about misstatements.

Policy: An alternate rule that punished intentional misstatements would break open the court flood gates concerning questions of intent for a fraud suit.

CL remedies for a combination gone bad:

Fraud claim (tort) or Misrepresentation (contract).

With both there must be a statement of fact, that it was false.

For fraud, that it was made with scienter (they intentionally lied—the hard thing to prove), that they did it to deceive, that you relied on it, and that you were hurt.
For misrepresentation, must also be material (hard part to prove), rely on it reasonably (the hard part to prove—court arguments will consist of what else did you know that could have shown you knew it was false and thus it wasn’t reasonable that you relied on it), and that you were hurt.

Breach of rep in the confidentiality contract (what we should be using instead of CL claims) —

Need to prove only: falsity and that you were hurt (for damages purposes)
Don’t have to prove: materiality, reasonable reliance, or scienter
If it’s important, put it in the agreement to protect against deals gone bad.

You cannot exculpate yourself for a CL fraud in the contract/agreement itself though

e.g. “I rep and warrantee all this stuff……all the reps and warrantees previously stated are disclaimed from liability” = no good

ABA Confidentiality Agreement

Bi-directional—form of deal is a stock exchange
Why a letter agreement? What legal difference? NONE AT ALL—regarded as a bit less formal only
Section 3—“no teaming provision” (financial buyers will try to “club” together so that less money is required to be invested by each PE firm).

Rational – we want buyers competing with each other and bidding the price up, not colluding together. Have

The permission provision to allow for some exceptions.

Section 8 – Standstill provision. basically, the buyer agrees it will not have a hostile takeover, help anyone do such, buy shares that could affect this, etc.

Although the seller’s SHs might not want this provision

ctional law in general, i.e. shifting these risks to the party that can bear it cheaper and shifting benefits to those that value them the highest

Ex. Purchaser: 40%*200, 40%*100, or 20%*10=92 mill value lost
Seller: 80%*20, 20%*5=17mm
Joint surplus is 75mm in value created
Every cost is an opportunity if you know where to put it.

If buyer shifts the risk to seller, he’ll need to increase the price by that amount or give some other concession/risk being borne
probably the most important is the financial statements—annexed next to it will be a disclosure schedule—an integral part of the agreement. In Section 2.8

GAAP allows for some variance, thus the “consistency” language.
“fairly present the financial condition”—if both of these are true, you can fairly calculate the value based on finance formulas.
Prof wouldn’t accept “true in all respects” as a seller—i.e. there should be a materiality qualifier

nothing is ever completely true and correct or completely all of something—if you see this on a test ADD A QUALIFIER. Beware of other absolute terms like all, always, etc..
No one knows what material means other than something relative to the situation. Prof—best thing about big deals is that nothing is materiality (LOL). prof would add 2 “materials” to 2.9—before books/records and before accurately. Another way to qualify is with “to the best of my knowledge”. (proving knowledge is always difficult—Nixon, “perjury is a very hard thing to prove). This is a very reasonable concession for a buyer to make.
Other Qualifiers: To the disclosure schedule or to knowledge–almost worthless because it’s so hard to prove, but sometimes this is the most you can do.

Best knowledge rep—here though, this shifts the rep to a negligence standard, i.e. should you have known
If a buyer—would prefer no qualifier (i.e. a flat rep), but if not, would prefer materiality (objective), whereas knowledge is more subjective. Context matters—buyer should never accept qualifiers (i.e. a “flat” rep) for something like we own X number of shares

2.2 no subsidiaries—if this rep said there were subsidiaries, it should set forth a complete list of the subsidiaries.
2.4 authorization— an agent of the company must sign if it turns out its signed by someone not authorized, could claim fraud
2.5 capitalization rep–want to make sure you know how many shares and who owns them
2.7 consents — what if you had a prior agreement that would prevent the merger? Buyer could just call up the bank (or owner of the agreement) and offer to buy them out.

“closing over” is another option—just intentionally breach the agreement and pay the small amt of damages. If being bought out by a larger entity, the new owner of the agreement may actually benefit the bank or copier agreement owner.

2.10 no undisclosed liabilities–this provision is an NFW for a seller (no fucking way)—accounting statements through GAAP involve pretty certain liabilities. Some that are only kind of certain may not be presented. Also, since then many other liabilities have been incurred. The way this is written, it is certainly false and breaches the rep. all would related costs incurred be required to be paid under the indemnity by the seller. This is also fraud because we know it is false. Seller’s lawyer can say I wont let my client intentionally commit fraud and this argument would always win in negotiations

Ways to fix: “required to be recorded on the balance sheet that is not”—but this is already covered by the financial statement rep, i.e. it would be redundant.