negotiating preliminary agreements – pitfalls to avoid in the m&a context pli doing deals...
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Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark
PLI Doing Deals
March 28, 2007
Nicole E. Clark
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Speaker ProfileSpeaker Profile
Nicole E. Clark is a Partner in the Corporate section of Vinson & Elkins and focuses on public and private mergers, acquisitions and divestitures; securities offerings; and corporate governance matters. She can be contacted at 713.758.3344 or via email at [email protected].
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Preliminary AgreementsPreliminary Agreements
• Confidentiality Agreements (CAs)• Standstill Agreements• Exclusivity Agreements • Letters of Intent (LOIs)
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Preliminary AgreementsPreliminary Agreements
Practice Tip:
• Business people may view preliminary agreements as “standard” or “boilerplate.”
• To help avoid unintended consequences, lawyers should get involved early in the transaction.
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Confidentiality AgreementsBasic ElementsConfidentiality AgreementsBasic Elements
Definition of “confidential information” Obligation to protect the information Return of information Disclaimer of obligation to negotiate/consummate Disclaimer of warranty Unilateral vs. bilateral Definition of “representatives” Term/integration Access to employees
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Confidentiality AgreementsBasic ElementsConfidentiality AgreementsBasic Elements
Other possible provisions:• Prohibition on soliciting or hiring personnel• Most-favored nations clause• No clubbing• Standstill (if a public company target)• Exclusivity
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Definition of Confidential InformationDefinition of Confidential Information
• Typically, broadly defined to include all information concerning the business and affairs of seller that will be disclosed to the recipient, including materials prepared by the recipient
• Specific identification of confidential information
• Exclusions to the definition– Already in possession of recipient
– Becomes publicly available (other than through any breach by the recipient of the CA)
– Independently developed by recipient
– Exception when required by law or court order
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Definition of Confidential InformationDefinition of Confidential Information
• Sensitive information may include:– Trade secrets
• Term on confidentiality obligation can thwart required efforts to maintain secrecy
• Disclosure to one party can have effect vis-à-vis third parties• Defer disclosure• Buyers should consider having CAs assigned• Consult with IP counsel
– Privileged documents • Disclosure may create risk of waiver• Consider discussion among lawyers rather than provision of documents• Consider “common interest” language if disclosure necessary
– But note that this language may flag the issue for third parties• Consult with litigation counsel
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Definition of Confidential InformationDefinition of Confidential Information
• Disclosures to competitors may create antitrust risks– Pricing or other competitively sensitive information– Potential approaches:
• Exclude sensitive information from disclosures• Identify materials that will not be disclosed• Limit disclosure to recipient’s personnel not in a position to
violate antitrust laws• Defer disclosure until late in the process• Avoid mutual exchanges
– Be aware that express provision in CA may flag the issue– Consult with antitrust counsel
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Obligation to protect the informationObligation to protect the information
• Limited purpose– “assist the bidder and its representatives in connection with a
possible negotiated transaction”– “possible” in order to avoid implication that there is an
agreement in principle– “negotiated” in order to reinforce that the company’s purpose
is to facilitate a process which it controls and that it would be a breach for bidder to make a hostile bid (if target is a public company)
• Agreement not to use the information “in any way detrimental to the Company”– Viewed as broad by recipients
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Obligation to protect the informationObligation to protect the information
• Enforcement– Acknowledgment that money damages are insufficient– Express inclusion of injunctive relief and specific performance
(non-exclusive remedy)– Governing law– Consent to jurisdiction of a specific court
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Return of InformationReturn of Information
• Return or destroy– At bidder’s or seller’s option?
• Bidder may request to have the right to keep one copy (usually by its outside counsel)
• Electronic data rooms• Email
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“Representatives”“Representatives”
• Who is covered?– Private equity bidders may be especially sensitive to the inclusion of
“affiliates” in definition
• Disclosure on a “need to know” basis• Bidder may seek to limit obligations for actions of its
representatives• Execution of acknowledgements
• “Clubbing” concerns– Definition of representatives may expressly exclude other equity
participants; additional provisions may also prohibit clubbing– Definition of representatives may expressly exclude potential lenders
unless identified; additional provision may prevent bidders from exclusive use of a debt financing source
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Term/IntegrationTerm/Integration
• Seller’s form may not include any term provision• Bidder will seek to limit (e.g., for 1-2 years)• Consider the type of the information disclosed
– Trade secrets – specified term can thwart required efforts to maintain secrecy
• Consider varying survival, if warranted• Consider delaying disclosure of the most sensitive
information• Integration clause in definitive agreement
– CA to be modified or superseded
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Non-solicit of EmployeesNon-solicit of Employees
• Non-solicitation of employees– Generally see 6 months – 2 years– Bidder may want to limit to those introduced through process– Exception for general solicitation or employees laid-off by
seller
• Non-solicitation clauses that extend to customers and suppliers could be a “back-door” non-compete
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Most-favored nations clauseMost-favored nations clause
• Bidder negotiates to receive most preferential terms granted to any other bidder.
• Seller will want to retain flexibility to respond to bidders depending upon their individual circumstances.– For example, in the public company context, if a bidder
already has commenced a tender offer, the company may agree to a CA without a standstill with such bidder and arguably it should not have to agree to waive its standstill with another bidder merely because the other bidder had obtained a most favored nations clause
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Standstill (if a public company target)Standstill (if a public company target)
• Agreement by bidder to not pursue an acquisition of the target other than by negotiating with the target’s management and the board for a specified period– Prohibitions on acquisition of target securities– Prohibitions on proxy solicitations– Restrictions on requests for waivers
• Advantages for target:– Avoid hostile offer– Greater control over auction process– Avoiding public disclosure
• Advantages for bidder:– Access to non-public information
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StandstillStandstill
• Bidder may seek to limit the standstill so that it will terminate if a third party proposes to acquire the target
• In two recent cases, bidders who had executed a standstill were precluded from making topping bid
• Important to note that even if there is not an explicit standstill provision, receipt of material non-public information (for example, projections) and/or limited use clause may restrict bidder from proceeding on a hostile basis
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Exclusivity AgreementsExclusivity Agreements
• Agreement by potential seller to deal exclusively with one potential buyer for a specified period of time
• Buyer may require before investing a significant amount of time and expense in due diligence and negotiations
• Shift in leverage– Seller may desire to negotiate for as many material terms as it
can upfront, in exchange for exclusivity, when its leverage is greatest
• Buyer may ask for notification of unsolicited offers
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Letters of IntentLetters of Intent
• Used to outline the material terms of a proposed transaction – Usually signed by both parties (as opposed to a term sheet)– Almost always intended to be non-binding, except for certain
limited terms (such as confidentiality, exclusivity, expenses)
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Letters of IntentLetters of Intent
• Advantages to using an LOI– Creates a roadmap – Helps to expose any “deal breakers” – May enhance parties’ commitment/ moral obligation to the
deal – Solidifies understanding - helps to avoid “selective memory”– May be useful to buyer in seeking financing– Can help facilitate earlier compliance with regulatory
requirements
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Letters of IntentLetters of Intent
• Disadvantages– For a public company it may create an obligation to disclose
the proposed transaction before the parties would otherwise like
– Risk of unintended consequence of being construed as a binding agreement • Pennzoil v. Texaco — $11 billion damage award against
Texaco over its tortious interference with Pennzoil’s memorandum of agreement to acquire an interest in Getty Oil
– Risk of unintended consequence of having an obligation to negotiate in good faith
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Letters of IntentLetters of Intent
Courts found obligation to negotiate in good faith when:• The parties did not state expressly an intention to be bound or not
– Party’s reservation of right of approval to its board of directors did not leave it free to abandon the transaction
• Language in the LOI – LOI stated that the parties “shall make every reasonable effort to
agree upon and have prepared” a contract setting forth the terms and conditions of a merger to be agreed upon
• Conduct of the parties after executing the LOI – Court noted that oral assurances, reliance and awareness of reliance
was substantial enough to establish a triable claim under promissory estoppel doctrine
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Letters of IntentLetters of Intent
• To avoid unintended consequences – Be explicit and precise as to intent to be bound or not
• Specify provisions that are binding and precise remedy for breach
– If further negotiations are contemplated, a court may find a duty to continue to negotiate in good faith• To avoid uncertainty, parties may choose to affirm this
duty or to expressly reject it – State that each party bears its own expenses whether or not
definitive agreement is reached– Specify period for future negotiation
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Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark
PLI Doing Deals
March 28, 2007
Nicole E. Clark