negotiating and navigating the fraud exception in private company...

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Presenting a live 90-minute webinar with interactive Q&A

Negotiating and Navigating the Fraud

Exception in Private Company Acquisitions Key Considerations For Drafting a Fraud Exception to an M&A Contractual Indemnification Provision

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MARCH 22, 2017

Wilson Chu, Partner, McDermott Will & Emery, Dallas

P. Gregory Hidalgo, Partner, McDermott Will & Emery, Dallas

Jessica C. Pearlman, Partner, K&L Gates, Seattle

Srinivas M. Raju, Director, Richards Layton & Finger, Wilmington, Del.

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-888-450-9970 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can

address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

All Bets off: Negotiating and Navigating the Fraud

Exception in Private Company M&A

Wednesday, March 22, 2017

Jessica Pearlman

K&L Gates, Seattle

[email protected]

Gregory Hidalgo

McDermott Will & Emery, Dallas

[email protected]

Srinivas Raju

Richards, Layton & Finger,

Wilmington, DE

[email protected]

Wilson Chu

McDermott Will & Emery, Dallas

[email protected]

6

Exclusive Remedy

The rights set forth in [the Agreement’s

Indemnification provisions] will be the

exclusive remedy for breach or inaccuracy of

any of the representations and warranties set

forth in Articles 3 and 4 and will be in lieu of

all remedies available in law or equity.

(ABA Model Stock Purchase Agreement, Second Edition)

7

Punitive Damages for Fraud and Fraudulent

Inducement: Showing "Malice"

Under Delaware law, punitive damages are available when:

"Unlike contract damages, which are intended solely to compensate the non-breaching party for its

expectation loss regardless of the willfulness of the breach, punitive damages are intended to punish

tortfeasors whose wrongful conduct was committed with willfulness, wantonness, or malice. Punitive

damages are generally permitted for conversion where the conversion "involves elements of . . . ill

will, malice, recklessness, wantonness, oppression, insult, willful or conscious disregard of the

plaintiffs rights, or other aggravating circumstances." Data Mgm't Internationale, Inc., v. Saraga, No.

C.A. No. 05C-05-108, (Del. Chanc. 2007).

In Delaware, malice requires:

"malice requires a showing of "ill-will, hatred, or intent to cause injury." Malice also may be found after a

party has demonstrated a reckless disregard for another's trade secrets with the intent to cause

injury. The key requirement in finding malice in this context, therefore, is a showing that one party

acted with the intent to cause injury to the other." Great American Opportunities, Inc.., v. Cherrydale

Fundraising, LLC, Civil Action No. 3718-VCP, (Del. Chanc. 2010).

In Texas…

With respect to punitive damages for fraud or fraudulent inducement, Texas requires a showing of

"malice," which is statutorily defined as:

"a specific intent by the defendant to cause substantial injury or harm to the claimant" Tex. Civ. Prac.

& Rem. Code Section 41.001(7)

9

Exclusive Remedy – The Fraud Exception

Except for fraud, the rights set forth in [the

Agreement’s Indemnification provisions] will

be the exclusive remedy for breach or

inaccuracy of any of the representations and

warranties set forth in Articles 3 and 4 and

will be in lieu of all remedies available in law

or equity.

11

Non-Reliance

Buyer has not relied on Sellers with respect to any matter in

connection with Buyer’s evaluation of the Company other than the

representations and warranties of Sellers specifically set forth in

Article 3 [Seller’s representations and warranties], and Buyer

acknowledges that Sellers are not making any representations or

warranties, express or implied, of any nature whatsoever with

respect to the Company other than specifically set forth in Article 3.

(ABA Model Stock Purchase Agreement, Second Edition)

13

“No Other Representations”: Enough?

No Other Representations and Warranties. Except for the

representations and warranties contained in this Article 3 (including the

related portions of the Disclosure Schedules), none of Seller, the

Company or any other Person has made or makes any other express

or implied representation or warranty, either written or oral, on behalf of

Seller or the Company, including any representation or warranty as to the

accuracy or completeness of any information regarding the Company

furnished or made available to Buyer and its Representatives (including

the Confidential Information Memorandum prepared by [financial advisor]

dated ____ and any information, documents or material made available to

Buyer in the Data Room, management presentations or in any other form

in expectation of the transactions contemplated hereby) or as to the future

revenue, profitability or success of the Company, or any representation or

warranty arising from statute or otherwise in law.

14

1. The defendant made a representation to

the plaintiff;

2. The representation was material;

3. That representation was false;

4. When the defendant made the

representation, the defendant either

knew the representation was false or

made the representation recklessly, as a

positive assertion without knowledge of

its truth;

5. The defendant made the representation

with the intent that the plaintiff act on it;

6. The plaintiff relied on the representation;

and

7. The representation caused the plaintiff

injury.

In Re International Profit Assocs., 274 S.W.3d 672, 678 (Tex. 2009).

Elements of fraud in Texas Elements of fraud in Delaware

1. A false representation, usually one of

fact, made by the defendant;

2. The defendant's knowledge or belief that

the representation was false, or was

made with reckless indifference to the

truth;

3. An intent to induce the plaintiff to act or

to refrain from acting;

4. The plaintiff's action or inaction taken in

justifiable reliance upon the

representation; and

5. Damage to the plaintiff as a result of

such reliance

Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992)

15

The additional element for fraudulent

inducement in Texas

Under Texas law, fraudulent inducement requires the same elements plus one

additional element of proof: that the plaintiff entered into a binding agreement

as the result of the fraud. Haase v. Glazner, 62 S.W.3d 795, 797-98 (Tex.

2001).

Fraudulent inducement has the same elements of fraud under Delaware common

law. Smith v. Mattial, C.A. No. 4498-VCN, at * n. 37 (Del. Chanc. 2010).

16

Exclusive Remedy – The Fraud Exception…

Except for intentional fraud, the rights set

forth in [the Agreement’s Indemnification

provisions] will be the exclusive remedy for

breach or inaccuracy of any of the

representations and warranties set forth in

Articles 3 and 4 and will be in lieu of all

remedies available in law or equity.

17


Except for intentional fraud committed

with the Knowledge of Sellers, the rights

set forth in [the Agreement’s Indemnification

provisions] will be the exclusive remedy for

breach or inaccuracy of any of the

representations and warranties set forth in

Articles 3 and 4 and will be in lieu of all

remedies available in law or equity.

19


Except for fraud or intentional

misrepresentation, the rights set forth in [the

Agreement’s Indemnification provisions] will

be the exclusive remedy for breach or

inaccuracy of any of the representations and

warranties set forth in Articles 3 and 4 and

will be in lieu of all remedies available in law

or equity.

ABA Model Stock Purchase Agreement, Second Edition)

20

Exclusive Remedy – The Fraud Exception

Except for fraud or willful misconduct, the

rights set forth in [the Agreement’s

Indemnification provisions] will be the

exclusive remedy for breach or inaccuracy of

any of the representations and warranties set

forth in Articles 3 and 4 and will be in lieu of

all remedies available in law or equity.

21


Except for intentional fraud committed

with the Knowledge of Sellers (in which

case, solely against the Person or

Persons committing or alleged to have

committed such intentional fraud), the rights

set forth in [the Agreement’s Indemnification provisions] will

be the exclusive remedy for breach or inaccuracy of any of

the representations and warranties set forth in Articles 3

and 4 and will be in lieu of all remedies available in law or

equity.

22

Wilson Chu (Mergers & Acquisitions)

Wilson Chu is a partner in the Dallas office of McDermott Will & Emery. He focuses his practice on

mergers and acquisitions (M&A), joint ventures and other strategic transactions, as well as related

corporate governance, for clients ranging from Fortune 500 serial acquirers to private equity funds and

high-growth, high-profile technology companies in the United States and abroad. While he has

experience in a wide range of industries, his practice is heavily weighted in the technology and health

care sectors, with an emphasis on the converging fields of healthtech and fintech.

His representative clients include the following:

AmerisourceBergen Corporation (NYSE: ABC)

Renren, Inc. (NYSE: RENN)

Sabre Corporation (NASDAQ: SABR)

Xerox Corporation (NYSE: XRX)

7-Eleven, Inc.

As the creator of the American Bar Association's (ABA) influential M&A Deal Points Studies, Wilson is

widely recognized for his thought leadership that continues to shape M&A practice globally. He was a

founding co-chair of the ABA'S M&A Market Trends Subcommittee, which publishes the Deal Points

Studies.

Wilson is founding co-chair of the University of Texas Mergers & Acquisitions Institute, the country's

leading private company M&A conference, the founding chair of the International Finance Law

Review/Inter-Pacific Bar Association's Asia M&A Forum in Hong Kong, Asia's leading M&A law

conference, and founding chair of the Mergers & Acquisitions Section of the Dallas Bar Association.

23

Greg Hidalgo (Mergers & Acquisitions) Greg Hidalgo is a partner in the Dallas office of McDermott Will & Emery. His practice reflects his

passion for collaborating with clients to achieve their business objectives and to develop meaningful

and enduring client relationships.

Greg has extensive experience counseling and providing innovative and client-centered solutions for

publicly held and privately owned clients in the areas of mergers and acquisitions (M&A), joint

ventures, corporate governance and other corporate-related matters. He also represents clients in

corporate finance and capital market transactions.

Greg's client relationships span a variety of industries, including technology, commercial real estate

services, consumer products, energy, health care, manufacturing, private equity, retail and

telecommunications.

Greg began his career as a certified public accountant with Ernst & Young LLP, where he worked from

1987 to 1990. He regularly utilizes his financial experience when representing clients.

Greg speaks frequently on various hot topics at conferences and on webinars, including issues such

as negotiating the fraud exception, the black art of winning M&A auctions, transitioning closely held

businesses, and the JOBS Act.

24

Jessica Pearlman (Mergers & Acquisitions)

Jessica Pearlman is a partner in the corporate group of K&L Gates LLP and resides in the Seattle office.

Ms. Pearlman represents emerging and established companies in various corporate, securities, and

finance matters, with an emphasis on mergers and acquisitions for both public and private clients,

domestic and international. Ms. Pearlman has particular depth of experience in various technology

sectors, including healthcare applications, software, social media, data security, data storage, mobile

applications, and search and search engine optimization, as well as in digital and traditional media,

biotechnology, and transportation.

Ms. Pearlman is a frequent presenter on mergers and acquisitions topics and was selected for inclusion in

The International Who's Who of Merger and Acquisition Lawyers, Who's Who Legal (2015) and as a

Washington Super Lawyer and one of the Top Women Attorneys in Washington (2013-present), as well as

a Washington Rising Star (2006-2009). Ms. Pearlman was also a winner of the 2013 ILO Client Choice

Awards. Ms. Pearlman is an adjunct professor at the University of Washington School of Law, is active in

leadership roles with the Mergers & Acquisitions Committee of the American Bar Association’s Section of

Business Law and is a member of the Thomson Reuters Business Law Solutions Advisory Board.

25

Srinivas Raju (Mergers & Acquisitions) Srinivas M. Raju is a member of the Wilmington, Delaware law firm of Richards, Layton & Finger, P.A.

His practice focuses on corporate advisory, corporate governance, transactional, and complex

litigation matters relating to Delaware corporations, limited partnerships and limited liability companies.

Srini has litigated numerous corporate control, corporate governance, and contractual disputes in the

Delaware Court of Chancery and the Delaware Supreme Court. He has also advised corporate boards,

special committees, and general partners with respect to governance and transactional issues.

Srini is frequent speaker on fiduciary duty and governance issues, particularly with respect to

Delaware limited partnerships and limited liability companies. He has also published numerous

articles on these topics, including articles published in The Business Lawyer, Securities &

Commodities Regulation, Delaware Journal of Corporate Law, and Insights, and is co-author of a book

titled Special Committees: Law and Practice (Oxford 2011). Srini has been recognized in Chambers

USA; Benchmark Litigation; The Best Lawyers in America; Lawdragon; PLC Which Lawyer; Super

Lawyers; and The Legal 500.

26

Disclaimers

This presentation (including the remarks of the speakers) is intended merely to provide a general

introductory overview of certain trends and developments affecting M&A transactions. It is not intended to

provide a complete analysis of the matters covered and there are potentially important exceptions and

qualifications that are not reflected herein or wherever Google-able.

The sample provisions included in these materials are intended only to serve as examples of hypothetical

(i.e., make-believe) provisions.

M&A is an art not a science, so do your homework. For example, all provisions must be carefully tailored to

reflect the specific terms of the transactions to which they relate.

This presentation:

• does not necessarily reflect the views of the speakers or their firms, and the speakers reserve the right

to flip-flop as the context requires.

• is not (i) provided in the course of and does not create or constitute an attorney-client relationship, (ii)

intended as a solicitation, (iii) intended to convey or constitute legal advice, and (iv) a substitute for

obtaining legal advice from a qualified, high-dollar attorney.

Past performance does not guarantee future results. We do not use “cookies” or MSG. Do not text when

driving, walking or reading this presentation. If you have an interest in this presentation that lasts more

than 4 hours, get medical help right away.

negotiating and navigating the fraud exception in private company...

Documents