Mergers and Acquisitions Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisers Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more For a list of available titles, visit our website at www.WileyFinance.com Mergers and Acquisitions Second Edition A Step-by-Step Legal and Practical Guide EDWIN L MILLER JR LEWIS N SEGALL Copyright © 2017 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey The first edition of Mergers and Acquisitions was published by John Wiley & Sons, Inc in 2008 Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Names: Miller, Edwin L., author | Segall, Lewis N., 1970– author Title: Mergers and acquisitions : a step-by-step legal and practical guide +website / Edwin L Miller, Jr., Lewis N Segall Description: Second edition | Hoboken, New Jersey : Wiley, 2017 | Series: Wiley finance | Includes index Identifiers: LCCN 2016051178 (print) | LCCN 2016051981 (ebook) | ISBN 9781119265412 (hardback) | ISBN 9781119276753 (pdf) | ISBN 9781119276777 (epub) Subjects: LCSH: Consolidation and merger of corporations—Law and legislation—United States | BISAC: LAW / Mergers & Acquisitions | BUSINESS & ECONOMICS / Mergers & Acquisitions Classification: LCC KF1477 M55 2017 (print) | LCC KF1477 (ebook) | DDC 346.73/06626—dc23 LC record available at https://lccn.loc.gov/2016051178 Cover Design: Wiley Cover Images: (top) © fztommy/Shutterstock; (bottom) © zffoto/Shutterstock; © Dmitri Mikitenko/Shutterstock Printed in the United States of America 10 From Ed: I dedicate this book to my family—my extraordinarily tolerant and supportive wife, Barbara; my son, Russ, who beat me at chess at age 5; and my daughter, Lindsay, who was one of 150 admitted to her medical school out of 11,000 applicants From Lew: I also dedicate this book to my family, who could be an excellent law firm in their own right one day—my wife, Christian, the best nonpracticing lawyer I know; Garnett (8), the advocate; Sawyer Jane (12), the negotiator; and Harper (13), the mediator And Birdie, our Cavalier King Charles, who keeps us all on our toes Contents Preface xi Acknowledgments xv CHAPTER Structuring Fundamentals Basic Corporate Finance Concepts Reasons for Acquisitions Three Basic Acquisition Structures Structuring Considerations: Overview CHAPTER The Acquisition Process Overview Valuation of the Business Investment Bank Engagement Letters Confidentiality Agreements Letters of Intent Stay Bonuses and Other Employee Retention Arrangements Business and Legal Due Diligence Intellectual Property Due Diligence From Signing to Closing Appendixes CHAPTER Corporate (Nontax) Structuring Considerations Business Objectives and Other Nontax Structuring Considerations Acquisition Structure Diagrams Forms of Acquisition Consideration Debt Cash, Stock, and Earnouts 1 11 14 20 20 27 30 35 37 39 42 55 66 67 69 69 78 78 83 96 vii viii CONTENTS Successor Liability and the De Facto Merger Doctrine Securities Law Compliance Antitrust Compliance: Hart-Scott-Rodino Act Equity Compensation Incentive Stock Options Employment Agreements and Noncompetition Covenants Indemnification Employment and Benefits Law Acquisition Accounting Recapitalization Accounting Appendixes CHAPTER Tax Considerations Taxable Versus Tax-Free Transactions: Overview of Relevant Situations Detailed Analysis of the Positions of the Target and Its Owners and of the Buyer Taxable Transactions and Their Tax Effects Tax-Free Transactions Special Situations Golden Parachute Tax CHAPTER The Definitive Acquisition Agreement Economic Terms Representations and Warranties Covenants Additional Agreements Conditions to Closing Survival of Representations and Indemnification Termination Miscellaneous Representing Targets: A Summary Appendixes CHAPTER Acquisitions of Public Companies Public-to-Public Mergers: What is Different? Case Law–Developed Fiduciary Duties and Standards of Review 101 104 114 120 126 130 136 138 140 144 145 146 146 148 150 154 159 164 169 169 184 196 199 200 201 206 206 207 210 211 211 214 Contents Evolution of Fiduciary Duty Case Law and Judicial Review Securities Laws and Public Company Acquisitions Anti-Takeover Devices Appendix CHAPTER Leveraged Buyouts (Structural and Tax Issues) and Acquisitions of a Troubled Business (Creditors’ Rights and Bankruptcy) Leveraged Buyouts: Structural and Tax Issues Acquisition of a Troubled Business Generally Fraudulent Transfers Acquisitions Out of Bankruptcy CHAPTER International M&A Cross-Border Acquisitions CHAPTER Joint Ventures Reasons for Joint Ventures Types of Joint Ventures Typical Joint Venture Terms Appendix ix 220 237 247 256 257 257 263 265 272 282 282 292 292 293 295 304 About the Website 305 Index 307 Preface his book attempts to convey a working knowledge of the principal business terms, customary contractual provisions, legal background, and how-tos applicable to business acquisitions It is not meant to be either a traditional law text or a purely business book, but combines elements of both Entrepreneurs and other business professionals should have a working knowledge of the legal basics of their deals The best business lawyers counsel their clients not only on the legal framework of a transaction but also on the interplay between legal concepts and business terms In a sense, there is no distinction between them Our hope is that reading these materials will benefit business owners and managers who want to understand more deeply the acquisition process and the major corporate, tax, securities law, and other legal parameters of business acquisitions; lawyers who would like to know, or need a refresher on, what they should be discussing with clients who are either buying or selling a business; and law or business school students who want to learn the legal and business fundamentals of acquisitions, and who also want to get a jump on real-world acquisition practice Each chapter consists of commentary on what’s really going on in typical situations at each stage, and an in-depth discussion on the particular subject The appendixes include model or sample documents for a number of common transactions, as well as additional materials (Appendixes can be found on the Web See “About the Website.”) More specifically, this book attempts to three things The first is to survey and explain the principal legal factors that affect the feasibility and economic consequences of acquisitions Almost all transactions are feasible in the sense that it is legally possible to them One rare exception would be blockage by the antitrust authorities It is also true that acquisitions usually can be structured and implemented in a number of different ways Different structures have different economic consequences to the parties that might not be initially apparent The business lawyer and other deal professionals (investment bankers as well as business development and other personnel) must devise different structures and implementation schemes and analyze the economic consequences of each Along with factors that are purely economic, like whether a transaction is taxable, the risks involved in various approaches also must be analyzed and explained T xi xii PREFACE Given a particular structure, the economic consequences and risks of a particular transaction are affected by what is called the private ordering of the transaction That means that the business and legal terms of a transaction can be incorporated into applicable legal documents (e.g., a merger agreement) in a wide variety of ways The experienced deal professional will know the alternatives and, as negotiator, will have the task of getting the other side to agree to as many provisions as possible that are favorable to the client Lastly, we discuss some of the policy implications of various rules and cases, along with some of the academic theory behind them This information is not of great practical value, and not much time is spent on it Most academic textbooks and the press spend a hugely disproportionate amount of time on the blockbuster deals of the day Legal practitioners spend huge amounts of time trying to make sense out of the latest Delaware takeover case (to the extent that is possible) That is all interesting and important to know, but these cutting-edge tactics and theories have little application to the large majority of merger and acquisition (M&A) transactions Public and private deals differ in many respects Also, in many ways, the business and legal terms in these large public transactions tend to be less variable—there is no time for the deal professionals to fiddle around, and the incremental value of an improvement in terms may be miniscule compared to the value of the deal We not ignore these issues, but our larger intent is to prepare the reader in greater depth for the acquisitions that make up the large majority of transactions So, going back to regulatory and other legal factors, what is the basic mental legal checklist that a deal professional should run through when presented with a particular transaction? The principal structuring parameters are: ■ ■ ■ ■ ■ ■ Tax law (definitely first) Corporate law Securities law Antitrust law Bankruptcy and insolvency law Accounting We explore each of these factors in detail Different types of acquisition transactions have very different legal parameters The basic types of acquisition transactions are: ■ ■ Publicly traded company acquires another public company for stock Publicly traded company acquires another public company for cash Joint Ventures 299 period, usually two to five years, thereafter Whether or not the parties are willing to bind themselves to a noncompete, they will want key executives and employees of the JV to be subject to noncompetition agreements similar to many operating businesses Noncompetition agreements for individuals were further discussed in Chapter Intellectual Property Background IP Each party to a JV must be concerned with protecting its existing intellectual property First, the JV agreement needs to clearly set forth exactly what background IP is being contributed for use in the joint venture This could be all, some, or none of a party’s intellectual property The contribution could be a contribution of the IP to an entity joint venture, or a limited license to the other party with the requirement that the IP be used exclusively for the purposes of a contractual JV Generally, a startup that is party to a JV will want to limit its contributed or licensed background IP to that which it feels is necessary to the JV and chooses to make available to the joint effort On the other hand, a larger strategic partner typically will seek access to all of the startup’s background IP, subsequently acquired IP, and any improvements to either created by the startup, although the larger party will want to limit its own disclosures, especially if it has multiple business lines For example, a gas and oil company partnering with a biofuel startup will not want to make available intellectual property unrelated to a biofuel-driven JV, which could be the result if the provisions are not carefully drafted Resulting IP The rights to the resulting IP, that which is derived from the development efforts under the JV, may be allocated in a number of ways In an entity JV, resulting IP generally should vest with the JV entity because it or its employees have conducted the development efforts Where a contractual JV is in place, a startup’s position may be that jointly developed IP should be jointly owned by the parties, although exclusively used toward the contractual JV effort while its operations are continuing and then freely exploited, or exploited with restrictions when operations cease The case for joint ownership may also be made in an entity JV to preserve rights in the IP should the venture be dissolved Maintaining joint ownership can be easier said than done, however It raises a number of issues with respect to which party bears the responsibility for patent prosecution, as well as maintenance, defense, and enforcement of intellectual property—all points to be negotiated A larger party with financial wherewithal may insist that it is the 300 MERGERS AND ACQUISITIONS owner of resulting IP, since it will have the resources to keep the IP portfolio intact, with the requirement that it grant appropriate licenses to the JV and JV partner Depending on the circumstances, it may make sense to allocate ownership of resulting IP in other ways, such as based on different fields of use (e.g., the biofuels startup may take ownership of developed materials, while its chemicals manufacturer partner takes ownership of any manufacturing process technology) A common JV structure involves an IP development phase, with commercial agreements benefiting the partners in the JV to be negotiated at a later stage If the parties succeed in their goals and create resulting IP that is able to be commercialized, usually the parties stipulate that they will enter into agreements relating to the manufacture, supply, and/or distribution of the technology-based products, so ownership of resulting IP is less of an issue while this commercial arrangement is in effect One caveat is that if the terms of the agreements to commercialize resulting IP are not fleshed out enough at the IP development phase, the parties may be left with an agreement to agree on a future agreement, which may not be enforceable in many jurisdictions if the parties cannot come to terms at this later stage Reversion of IP Rights Once an asset is contributed to an entity JV by one of the parties, it becomes the property of the JV Ordinarily, a dissolution of the entity JV means that its assets will be sold if possible and the resulting cash, after payment of liabilities, is distributed to the members A concern of a smaller party to the JV may be what happens to the IP if its partner does not put forth the time, effort, or additional capital required to successfully commercialize the IP Will the project “die on the vine” by virtue of the JV becoming less of a priority for the bigger joint venture partner on which the smaller party is relying? For this reason, the smaller party contributing IP may wish to structure its contribution as a revocable license, which would terminate upon the dissolution or extended inactivity of the JV Failing agreement to this type of arrangement by the larger JV partner, the smaller party may request the right to receive distribution in kind of its contributed IP upon dissolution of the JV entity, if there are sufficient assets to pay creditors The theory here is that it would be unfair if the smaller party were to put all of its eggs in one basket with no chance to capitalize on the IP it has developed with another partner should the JV fail for reasons unrelated to its own performance Joint Ventures 301 Distributions The parties to the JV will ordinarily want written parameters around how and when cash will be distributed An operational plan or the governing board of the JV may require reserves to be established for corporate needs, such as debt service or capital expenditures Absent agreement to the contrary, cash available for distribution may be distributed on an annual basis, or sometimes in shorter periodic increments What is available for distribution is usually a component of net profit or free cash flow, with various adjustments to be negotiated and documented Usually, provisions are made to distribute cash in order to pay taxes on income attributable to a joint venture that is a tax “flow-through” entity, such as an LLC Financial Reporting The parties will want to ensure they are receiving adequate financial reports and information Once operations warrant it, the parties will want the JV to pay for an audit of its financial statements on an annual basis Quarterly and sometimes monthly financial statements may be produced by management for distribution as well This type of visibility will be crucial for more passive parties that are not heavily involved with the management of the JV, as well as smaller parties in order to ensure they are being dealt with fairly by a larger partner Record-keeping requirements and rights to inspect or audit records may also be added Exit—Restrictions on Transfer; Tag-Along, ROFR, Put Right, Drag-Along Once a party gets into a joint venture, how easy is it to get out? JVs are collaborations between two are more parties presumably entered into based on a relationship, experience, or other intangible considerations in addition to the assets being contributed Typically no party can be easily replaced by another party For these reasons it is usually made difficult to exit a joint venture by selling one’s interest to a third party Transfers of JV interests may be prohibited for a period of time or allowed only upon the consent of the other parties to the JV Exceptions usually exist for transfers to affiliated entities, so long as the transferring entity remains “on the hook” for its obligations It should also be specified that the transfer to an affiliate is only permitted for so long as the transferee is an affiliate A poorly drafted agreement could permit a transfer of a JV 302 MERGERS AND ACQUISITIONS interest to an affiliate followed by a sale of the affiliate, allowing for a de facto sale to a third party without the consent of the partner to the JV The parties will also need to determine whether a party will be able to pledge its JV interest to a bank in support of the party’s credit obligations If the answer is no, the party may need to get permission from its lenders If sales of JV interests to third parties are permitted, each party and the JV should have a right of first refusal with respect to the sale This will allow the nontransferring party the ability to take ownership of its partner’s interest without having to partner with a third party with which it has no relationship, or perhaps a poor relationship If the JV or the nontransferring party does not exercise the right of first refusal, the nontransferring party may have the right to sell a proportionate interest in the JV, along with the transferring party This is commonly referred to as a tag-along or co-sale right Rights of first refusal and tag-along rights are sometimes resisted by a party more likely to sell its interest because these restrictions can make the interest less marketable, but they are commonly accepted protections for parties to a JV In order to assure liquidity, a party may negotiate the right to sell or “put” its interest to the JV entity or its JV partner after a period of time under certain circumstances The price to be paid could be based on an independent appraisal or a formula utilized by the JV’s particular industry in valuing similar companies Similarly, the JV entity or a party may have a right to buy out its partner or “call” the interest of the other JV partner after a period of time or in certain circumstances, such as a material breach of an agreement with the JV Such a buyout may be made at a discount or over an extended period to discourage a party from seeking a buyout by virtue of breaching its agreements with the JV Sometimes a provision is included for one party to defer the transaction in order to protect it against calculations that may be based on atypical financial results during a measurement period Put and call arrangements may also be put in place if the parties are deadlocked on fundamental issues of governance or operational direction and are not able to resolve their differences A drag-along provision allows one party to force the other party to agree to the sale of the entire joint venture to a third party This may be an appropriate right of a majority owner if it finds an offer for the joint venture that delivers a suitable return for all parties A drag-along may also be a remedy in the event of a breach of one party, or otherwise appropriate in connection with a dissolution of the joint venture for other specified reasons If the parties’ economic interests differ on dissolution, the potentially Joint Ventures 303 disadvantaged party may require protective provisions such as an outside fairness opinion Termination/Dissolution The parties will usually want to specify certain triggering events for a dissolution or termination of the joint venture These events may include: ■ ■ ■ ■ ■ The failure to meet certain objectives of the joint venture within a specified period of time The elapse of a period of time without regard to whether milestones have been met This will give either party the opportunity to walk away absent mutual agreement to continue the joint venture A material breach by one of the parties that has not been cured or is not susceptible to cure A deadlock on fundamental decisions that the parties or the joint venture’s governing board is unable to resolve The sale or other change of control of one of the joint venture partners This may be exercisable by the party changing control, the other party, or both Other Considerations Dispute Resolution Dispute resolution mechanisms can be very elaborate or nonexistent If there are issues that cannot be resolved by operational employees, or at the joint venture board level, sometimes these issues will get escalated up to higher-level decision makers at the respective joint venture parties in an attempt to resolve differences Failing resolution by the parties, mediation or arbitration provisions can be inserted instead of resorting to litigation Antitrust Compliance Joint ventures must be reviewed for any Hart-ScottRodino Act compliance requirements, similar to those discussed for M&A transactions in Chapter Ordinarily, investments of cash in a joint venture will be exempt from HSR requirements, but contributions of assets could trigger these provisions Additionally, the Federal Trade Commission and U.S Department of Justice issued the “Antitrust Guidelines for Collaborations Among Competitors” in April of 2000 These are useful guidelines for competitors that enter into joint ventures as to how these agencies will analyze joint ventures and why certain activities may be challenged as anticompetitive behavior 304 MERGERS AND ACQUISITIONS International Issues Of course, if a joint venture is operating internationally, or one of the parties is not a U.S entity, compliance with international requirements will need to be reviewed This may include international antitrust filings or other regulatory requirements, issues related to international tax structuring and accounting, and employment-related concerns APPENDIX The following appendix is located on the website that accompanies this book For information on the website, see the “About the Website” section at the back of this book Appendix 9, Joint Venture Checklist About the Website s a purchaser of this book, you have access to the supporting website: www.wiley.com/go/acquisitions2e The website contains files for the appendixes that are mentioned in this book: A Appendix 2A, Investment Bank Engagement Letter with Target’s Comments Appendix 2B, Confidentiality Agreement Appendix 2C, Letter of Intent Appendix 2D, Stay Bonus Plan Appendix 2E, Business Due Diligence Checklist Appendix 2F, Legal Due Diligence Checklist Appendix 2G, IP Due Diligence Checklist Appendix 2H, Merger Closing Agenda Appendix 3A, Convertible Preferred Stock Term Sheet Appendix 3B, Stock Option and Incentive Plan Appendix 3C, Employment Agreement Appendix 5A, Annotated Long-Form Merger Agreement Appendix 5B, Annotated Long-Form Asset Purchase Agreement (economic sections only) Appendix 6A, Sample Memorandum to Board of Directors on Fiduciary Duties in Connection with an Acquisition Appendix 9, Joint Venture Checklist The appendixes are provided in Word format The password to enter this site is: millersegall2 305 Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide, Second Edition, Edwin L Miller Jr., and Lewis N Segall © 2017 John Wiley & Sons, Inc Published 2017 by John Wiley & Sons, Inc Index A A reorganizations, 154 Accredited investors: generally, 107 limiting sales to, 110 Accretive (acquisitions), Accrual method of accounting, Acquisition accounting, 141–144 Acquisition consideration: generally, 78–83 debt, 83–96 earnouts, 98–101 stock, 96–98 Acquisition (sub)sidiary, 84 Advance notice of board nominations, 249 Antitrust laws, 18–19 Anti-dilution covenants (in preferred stock), 97 Anti-greenmail statutes, 245 Anti-takeover: generally, 248 devices, 247 state anti-takeover laws, 244–245 Appraisal rights, 13–14, 70–72, 76–77, 111–112, 178 Asset-based lending, 91 Asset purchase acquisition: generally, 11, 14 indemnification, 75 need for consents in, 73 recourse in case of misrepresentations in, 264 structure charts of, 82, 87 successor liability in, 101 special agreement provisions in, 177–181 tax, 16–17, 151–152 B B reorganizations, 155 Back-end merger, 13 Bankruptcy: generally, 257–281 acquisitions out of, 272–281 Basic v Levinson, 212 et seq Basis step-up, 146–147 Basket, 203–208 Bear-hug letter, 215 Beneficial ownership: generally, 240 anti-trust violation, 114–120 Benefits plans, 139–140 Beta, Bidding: generally, 21–24 bidder collusion, 278 protection devices, 276–277 Black Scholes formula, 122 Blank check preferred stock, 248 Blue sky laws, 18 Book, 21 Boot, 15, 154 Borrowing base, 91 Break-up fee, 197, 224–232 See also Deal-protection devices 307 Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide, Second Edition, Edwin L Miller Jr., and Lewis N Segall © 2017 John Wiley & Sons, Inc Published 2017 by John Wiley & Sons, Inc 308 Bring-down (of representations), 26 Bulk sales laws, 76 Bureau of Economic Analysis (BEA), 285–287 Business combination statutes, 245 Business judgment rule, 219–231 Business purpose doctrine/test: generally, 156 bankruptcy, 315 tax, 156 Buyer, xiii C C corporation: generally, 48, 146–153 tax, 147–150, 162 C reorganization, 155 Capital gains tax, 148 Capital asset pricing model, Caps and collars, 213–214 Carryover basis, 16–17 Cash-out statutes, 245 Cause (for termination of employment), 122 Classified or staggered board, 248 Closing: generally, 66 agenda, 87 conditions precedent, conditions to closing, 200–201 deferred, 66–67, 72–73, 170, 174 simultaneous with signing, 72, 170, 174, 200 Committee on Foreign Investment in the United States (CFIUS), 284 Comparable public company analysis, 29 INDEX Comparable transaction analysis, 30 Contingent Value Rights, 83 Confidentiality agreement, 21, 35–37 Consolidated group (tax), 158–160 Contingent value rights, 83 Continuity of business enterprise, 157 Continuity of shareholder interest, 156 Control: generally, 155, 156 control premium, acquisition of, 11, 228, 269 Control share statutes, 245 Conversion of shares, 175 Copyrights: generally, 58–59 due diligence, 66 Covenants, 196–199 Cross-border acquisitions, 146, 282–291 Crown jewels option, 217 CTS Corp v Dynamics Corp of America, 245 et seq D Data room, 23 De facto mergers, 102 Deal-protection devices, 24, 72, 197, 229, 282 Debt covenants, 91–92 Debt tiers, 92 Deductible (indemnification), 203–205 Default (debt), 95–97 Defend Trade Secrets Act (DTSA), 60 Defensive acquisitions, 11 309 Index Deferred closing, 72–73, 170, 174 Demand registration rights, 113 Deposits, 177 Director committees, 236 Direct merger, 79, 84, 260 Disclosure (of merger negotiations), 193 Discounted cash flow analysis (valuation), 28, 30 Disgorgement statutes, 245 Disinterested directors, 235 Dissenting shares, 176 Diversification, Double tax, 16–17 Down round, 135, 223 Drop-dead date, 206 Due diligence: generally, 296 business due diligence, 42–55 intellectual property due diligence, 65–66 legal due diligence, 42–66 Duty of care, 219, 234 Duty of loyalty, 134, 219, 235 E Earnings per share, 7–9 Earnouts, 98–101 EBIT, 28–29 EBITDA, 28–29 Economies of scale, 10 Efficient capital market hypothesis, Efficiency frontier, 5–6 Eligible accounts receivable, 91 Employment agreements, 26, 51, 130–131, 138, 170,192–193, 208, 287 Enterprise value, 27 Entire fairness standard, 221–222 EPS, 7–9 Equitable subordination, 93 Equity compensation, 120, 135 Equity method, 144–145 Equity value, 27 Escrow shares, 176 Escrows, 33, 39, 74–75, 202 ESOP transactions, 160–161 Event of default (debt), 94–94 Excess loss account, 160 Exchange offer, 12–13, 73, 83, 212, 223, 226, 242–243, 249, 291 Exclusivity See Deal protection devices Exon-Florio Act, 284 Extraordinary items, 28, 100 Extraterritorial Application of U.S Laws, 290 F Fair-price statutes, 246 Fiduciary duties, 214–219 Fiduciary out, 213–216 Financial engineering, 8–9 Founder’s stock, 121 Foreign Corrupt Practices Act (FCPA), 291 Forward triangular merger: generally, 74 structure charts of, 81, 86 Founders’ stock, 121 Fraudulent transfers, 265–272 Front-end-loaded tender offer, 226 G GAAP (Generally Accepted Accounting Principles), 2, 28 Going-concern value, 28 Golden parachutes: generally, 41 tax, 164 310 Good reason (for termination of employment), 41, 131–134 Go-shop clause, 216 See also Deal protection devices Greenmail: generally, 245 anti-greenmail statutes, 245 H Hart-Scott-Rodino Act: generally, 19, 25, 114–120, 303 commerce test, 115 CFIUS notices, 285 size of parties test, 18–19 size of transaction test, 18–19 waiting period, 117–118 Hostile takeovers, 225 Hybrid transactions (tax), 147 I Incentive stock options, 46, 121, 126, 164 Indebtedness, See Debt, 93 Indemnification, 136, 201–206 Indifference curves, 4–6 Inflows, Initial Public Offering (IPO): generally, 247 accelerated vesting upon, 123 Installment sale, 152–153 Interested shareholder, 250 Internal affairs statutes, 246 Internal rate of return, Intrinsic value, ISOs, 139, 121–125, 127 J Joint ventures, 292–304 Junior debt See Debt, 91–95 INDEX K Knowledge qualifiers, 187–189, 208 L LBOs, 144, 163, 258, 260–263, 272 Letter of intent, 22, 24, 37–39 Leveraged buyouts, 163–164, 257–281 Leveraged recapitalization, 257 Liability: generally, 75 assumption of, 179 successor, 180 Liquidation preference, 41, 87, 98, 122, 171–172 Lock-up provisions, 24, 215–218 See also Deal-protection devices Locked box, 283–284 Loss averse (vs risk averse), 3, M Management buyout (MBO), 163, 257 Market cap(italization), Marketing material, 21 Material adverse change/effect clause, 26, 92, 191, 200, 206–208 Materiality qualifiers, 190, 203–205, 208 Merger: generally, 11–13 direct, See Direct merger forward triangular, See Forward triangular merger need for consents in, 17–18 reverse triangular, See Reverse triangular merger Index structure charts of, 79–81, 84–86, 88, 260–262 tax, 17, See Type A Reorganization Mezzanine debt, 96 Mills Acquisition v MacMillan, 228 et seq N Negotiating points, 133–138 Net debt, 32, 182 Net income, 1, 98–100 Net operating loss carryovers, 29, 70, 147, 255 Net present value method, NOLs, 70, 148–151, 159–160 Noncompetition agreements, 50, 62, 131, 137, 298 Nondilutive deal, 10 Nonqualified stock options, 121, 125–126, 158 Normalize (accounting results), 28 No-shop agreements See Deal-protection devices and Lock-up provisions NQSOs, 121, 127, 135 O Omnicare v NCS Healthcare, 233 et seq One-line consolidation, 144 Original issue discount (OID), 153 P Parachute payments, 41, 136, 139, 164–167, 198 Paramount v Time, 224 et seq Pari passu (debt), 90, 93 311 Patents: generally, 56–58 due diligence, 66 Payment blockages, 94 Payment-in-kind (PIK), 84 P/E ratio, 8–9 Phantom stock, 123 Piggyback registration rights, 113 Poison pills, 245, 252–256 Pooling-of-interests, 19, 140, 200 Preclusive lock-ups See Deal-protection devices Preferred stock: participating, 97–98, 158–159, 171 paid-in-kind, 159 straight nonparticipating, 97 Price anti-dilution, 87 Price-to-earnings ratio, Priority in liquidation (debt), 94 Procedural and substantive fairness See Entire fairness Product line diversification, 10 Proxy rules, 104, 212, 243 Proxy statement, 25, 67, 72–73, 193–194, 212, 243, 256 See also Proxy rules Pull the plug (right to), 94–95 Purchase accounting, 19, 140 Purchase price adjustment, 181–184, 283–284 Purchase price per share, 171–172, 175–176 Push down accounting, 144 R Raider, 245 Ranking of debt See Subordination Rate of return, Recapitalization accounting, 19, 144–145 312 Registration rights: generally, 113 demand, 113 piggyback, 113 Regulation D, 106–107 Regulation M-A, 242 Relative valuation, 28–30 Remedy bars, 94–95 Reorganizations: generally, 154 Type A, 154 Type B, 155 Type C, 155 Representations and warranties, 184–195 Residual minority interest, 71 Residuals clause, 36 Restricted stock, 46, 121–125, 128–130, 135, 165, 208 Reverse triangular merger: generally, 18 need for consents in, 73–74 structure charts of, 80, 85, 261–262 Revlon v MacAndrews & Forbes, 223 et seq Right to exclude (patents), 56 Risk aversion, Rule 10b-5, 34, 104–105, 237–238 Rule 145, 110–111 Rule 162, 243 Rules 425 and 165, 242–243 Rule 501, 107 Rule 502, 108 Rule 503, 108 Rule 504, 109 Rule 505, 109 Rule 506, 109 INDEX S S corporation: generally, 148 restricted stock, 130 tax, 17, 147–153, 160–162, 166, 168 Sales in the ordinary course of business, 273–274 Safe harbor, 112 Sarbanes-Oxley Act: generally, 105 restricted stock, 130 public company requirements, 244 SARs, 123 Schedules 13D and 13G, 239–241 Section 203 (Delaware), 250–252 Section 306 preferred stock, 158 Section 338 election, 17, 151, 198 Section 351 transactions, 156–158, 162, 164, 261–263 Section 363 See Bankruptcy 277–280 Section 409A, 123, 168 Section 83(b) election, 125, 128–130 Securities Act of 1933, 109, 212, 280, 290 Securities Exchange Act of 1934, 104, 194, 211, 238 Senior debt See Debt 91–92, 94–95, 226 Service marks, 62 Severance arrangements, 40–41, 134 Shelf registration, 113, 208 Shop right (patents), 57 Short-swing profits, 241 Simultaneous signing and closing, 72, 170, 174, 200 Index Smith v VanGorkom, 220 et seq Spin-Offs, 161–162 Squeeze-out merger, 13–14, 17, 70, 73, 88, 218 Staggered board of directors, 248 State anti-takeover laws, 244–245 Stay bonuses, 39–42 Step transaction doctrine, 157 Step-up (in tax basis), 16–17, 80, 146–147 Stock appreciation rights See SARs 123 Stock purchase acquisition, generally, 11–12, 16 structure charts of, 79, 82, 83 need for consents in, 18 tax, 150 Stock Record Books, 45 Structural subordination See Subordination Subordination: generally, 87–93 agreements, 90–94 complete, 87 deep, 93 structural, 87 Subsidiary guarantee, 86, 93, 170 Substantially all assets, 76–77 Substantive fairness See Entire fairness Success fee, 31 Superior debt See Debt Survival (of representations and warranties), 201 Surviving corporation, 11, 13, 18, 71, 75, 138, 174, 176, 201 Sweat equity, 121 Synergies, 10, 224 313 T Tails (in investment bank engagement letters), 33 Target, xiii Tax planning, 288 Tax-free rollover, 163 Tax-Free Transactions, 154–159 Tender offer rules, 212, 239, 242–243 Termination (of merger agreement), 206 Threshold, 203–205 Time to market, 10 Topping fee, 250 See also Deal-protection devices Trade secrets: generally, 58–62 due diligence, 66 Trademarks: generally, 62–65 due diligence, 66 Treasury stock method, 172 Triangular merger: generally, 18 forward, See Forward triangular merger reverse, See Reverse triangular merger need for consents in, 73 Troubled businesses (acquisitions of), 263, 272 Two-step acquisition, 12–13, 73 U Unocal v Mesa Petroleum, 225 et seq Uniform Fraudulent Conveyance Act (UFCA), 267 314 Uniform Fraudulent Transfer Act (UFTA), 267 U.S Patent and Trademark Office (PTO), 57 V Valuation: generally, relative, 28–30 discounted cash flow analysis, 28, 30 Vesting, 40, 46, 49, 121–124, 127–130, 134–135, 139–142, 165 Virtual data room, 23 INDEX W Weinberger v UOP, 221 et seq Wellman v Dickinson, 241 et seq White knight, 223 Window-shop clause, 215 See also Deal-protection devices Works of authorship, 58 Y Yield, Z Zero coupon debt, 84 ... www.wiley.com Library of Congress Cataloging-in-Publication Data: Names: Miller, Edwin L., author | Segall, Lewis N., 1970– author Title: Mergers and acquisitions : a step- by -step legal and practical guide... a period of time, not as of a particular point in time But in order to Mergers and Acquisitions: A Step- by -Step Legal and Practical Guide, Second Edition, Edwin L Miller Jr., and Lewis N Segall... from Ed’s original draft by Jonathan Dubitsky; and the sections in Chapter on fraudulent conveyances and bankruptcy were written by Pat Dinardo and Pam Holleman Rick Mastrocola and Kathy Rizzo of