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 ... 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