Byron Egan, that plain talkin’ Texan (resident in the Dallas office of JacksonWalker), gave a taaallllkkk (said with the best Texas drawl you can muster) yesterday addressing the IRS’s new tax shelter disclosure rules.
As Byron noted, the topic of his presentation could well have been titled “The Law of Unintended Consequences.” If you read further you’ll see why. If you just want the “magic language” it’s towards the end of this blog. Be advised though, we are told by responsible sources that the IRS has declined to bless this or any other language attempts to accommodate the IRS rules. If there are any IRS staffers out there you might let us know if we’re getting close. Gulp, I hope that revelation (and subsequent very tiny bit of levity) doesn’t get me flagged for an audit. Hey, it was Wilson’s idea to put that in! That’s spelled W I L S O N C H U.
Here’s the text of Byron’s materials provided at yesterday’s presentation. I checked with Byron and even though he has a copyright on this material (and what good lawyer wouldn’t) he is ok with you using the “magic language”):
****
DRAFTING CONFIDENTIALITY AGREEMENTS AFTER
IRS REPORTABLE TRANSACTION REGULATIONS
By
Byron F. Egan, Dallas, TX*
On February 28, 2003, the Internal Revenue Service (“IRS”) issued final regulations relating to the disclosure of certain reportable transactions, the registration of certain tax shelters and tax shelter list maintenance requirements. T.D. 9046, 2003-12 I.R.B. 614 (February 28, 2003). These regulations impose a special reporting requirement that could require the reporting of ordinary commercial transactions to the IRS as tax shelters IF they contain typical confidentiality provisions. These new IRS regulations are leading many people to revise their confidentiality agreements to exclude from confidentiality matters relating to tax treatment or tax structure of transactions.
While the purpose of these regulations is to require taxpayers to report tax shelter transactions, the regulations were drafted so broadly that they could apply to certain commercial transactions that do not involve a tax shelter. One of the provisions of the new regulations requires reporting to the IRS of transactions subject to conditions of confidentiality with respect to the tax treatment or tax structure of the transaction (as those terms are broadly defined in the regulations), including certain acquisition agreements, settlement agreements, employment agreements and private placement memoranda. There are limited exceptions (i) where the restrictions on disclosure of tax treatment or tax structure are necessary to comply with applicable securities laws or (ii) for a taxable or tax free acquisition of (x) historic assets of a corporation that constitute an active trade or business or (y) more than 50% of the stock of a corporation, provided that the parties must be permitted to disclose the tax treatment and tax structure of the acquisition transaction no later than the earlier of: (A) the date of the public announcement of discussions relating to the transaction, (B) the date of the public announcement of the transaction, or (C) the date of the execution of an agreement to enter into the transaction. The regulations further grant a presumption of nonconfidentiality if there is a written disclosure authorization in the form provided by the regulations that excludes from confidentiality matters relating to the tax treatment or tax structure of the transaction. See Overview of Reportable Transaction Regulations by William H. Hornberger (July 24, 2003), which can be found at http://www.jw.com/site/jsp/featureinfo.jsp?id=10.
Set forth below is a form of disclosure authorization intended to conform to these IRS regulations:
(c) Certain Tax Information. Notwithstanding anything herein to the contrary and except as reasonably necessary to comply with applicable securities laws, any of Buyer, Seller or any Shareholder (and each employee, representative or agent of any of Buyer, Seller or any Shareholder) may disclose to any and all Persons, without limitation of any kind, the U.S. federal income tax treatment (as defined in Treas. Reg. § 1.6011-4) and U.S. federal income tax structure (as defined in Treas. Reg. § 1.6011-4) of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are or have been provided to any of Buyer, Seller or any Shareholder relating to such tax treatment or tax structure.
The author wishes to acknowledge the contributions of the following in preparing this paper: William H. Hornberger of Jackson Walker L.L.P. in Dallas, Texas.
****
Welcome my friends to another slippery slope.
Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
This is my first attempt at a WSJ’s Mossberg Solutions-like product/service review. This one’s on risk management due diligence.
Let’s imagine that you’re representing a buyer of a business. How good would you look in your client’s eye if you’re able to get a nationally-recognized risk management group to conduct due diligence on target’s insurance and other risk management matters – FOR FREE?
For years, my college tennis buddy, Dave Lukens (dlukens@lockton,com) of insurance brokers Lockton Companies (www.lockton.com), told me about his M&A Group based in NYC that – for no charge – analyzes target’s insurance policies and other risk management programs (including matters like coverages, claims, retentions, reserves, etc…) and produces a report to the buyer on Lockton’s findings and recommendations. (Of course, these guys are doing it to get their foot in the door but there’s no obligation to buy). They mainly offer this service to support Lockton’s buyout fund customers.
On a recent deal, the moons lined up (i.e., I finally remembered what Dave was telling me), and I recommended Lockton to perform the risk management due diligence on target. On (very) short notice, these guys dove into the data room, jumped on conference calls with us, and otherwise served as the client’s risk management department . On this deal, environmental liabilities was a particular concern and the Lockton guys were able to get their environmental specialists involved at a moment’s notice. In all, we got the expert analysis that we needed, got it fast, and got it for free.
Even if your client has a full-blown risk management dept, wouldn’t it be helpful to benefit from another expert’s investigation, analysis, and judgment – without cost to the client?
I wouldn’t be surprised if other insurance brokers offered this service but I’m certainly going to remember this for future deals.
To avoid being labeled by Larry and Broc as a blogless-wonder-for-life, I thought I’d incoherently spew about a pet peeve of transcendental proportions in M&A negotiations: “Does anyone really know what’s “market” or “standard?”
We’ve all heard – and even said – superficially deep statements like: “Well, a 10% liability cap is market” to “I’ve never seen a deal without ‘prospects’ in the MAE definition.” And yes, the most famous line ever to be uttered by the pre-puberty second year lawyer: “Oh, that’s standard in every deal I’ve seen” (Pretty persuasive stuff, huh?)
Does it ever make you wonder if the person using the “that’s standard or “that’s market” statement is truly arrogant enough to believe that that he’s the know-it-all of all deals terms under the sun? (Sometimes, it makes you wonder if the person is that smart – or that stupid.) Can this guy really detect a ripple in the Force?
To me, a “market term” depends on what part of the elephant that you, the blindfolded M&A lawyer, is touching. On one hand, you could think all merger agreements have “big trunk” terms or, on the other end (literally) of the elephant, you could think that all 10b-5 reps stink (and therefore aren’t “market.”).
Isn’t a “market term” just another negotiation tactic? Who really, really knows what’s market in the deal you’re negotiating? Don’t know but there are plenty of folks out there, however, that will be glad to tell you what they’re seeing (or think they’re seeing), with the hopes of convincing you that they’re in-the-know and you’re not.
As mentioned in some of Larry’s earlier blogs, Larry and I are in our third year of a study of deal points in publicly-disclosed middle market M&A deals. While I can tell you that purchase price caps show up about 22% of the time, I can’t tell you that a purchase price cap or any other cap level is “market.”
Is knowing “what’s market” more important than knowing why a particular term should be included or not – or worded a particular way? Whether you’re armed with statistical data from studies like ours or you possess a wealth of anecdotal evidence, I think “the why” is much more important than “the standard.” Of course, a combination of stats, deep anecdoctal evidence, AND “the why” probably works the best.
Which goes to prove – once again – that doing deals is more art than science.
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
MATERIALITY RELATED BLOG GENERATES STIR IN BLOGGING COMMUNITY.
O.K., not really, but it sounds good, doesn’t it? Anyway, for those readers who might not have access to “bring down condition” language that eliminates, at least in the walk right arena, the problem of double materiality, we thought we would take the liberty of posting an example, as follows:
“ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects, in each case on the date hereof and at the Effective Time (unless the representations and warranties address matters as of a particular date, in which case they shall remain true and correct in all material respects as of such date); provided, however, if any such representation or warranty shall be subject of a qualification as to “materiality,” such qualified representation and warranty shall be true and correct in all respects, in each case on the date hereof and at the Effective Time (unless the representations and warranties address matters as of a particular date, in which case they shall remain true and correct in all respects as of such date).”
If you think is fun (and who wouldn’t) just wait until we drop in an MAE condition!
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
EXACTLY HOW DO YOU QUANTIFY DOUBLE MATERIALITY (A/K/A THE METAPHYSICAL ASPECT OF M&A)?
Why would you want to, you ask? Isn’t materiality already something where reasonable minds might differ without doubling up on the concept, you ask?
Well, ponder this …. fully 35% of the transactions we reviewed (see parameters below) applied a test of materiality in individual seller reps and warranties and then again in the condition usually entitled “Accuracy of Representations and Warranties” (i.e., the “bring down” walk right). How wrong can a seller be when “double materiality” is applied to a rep in the context of a walk right? Some might say “completely!!”
Parameters: In our recent Deal Points Study we reviewed acquisition agreements relating to public company acquisitions of private companies with transaction values of between $25M and $150M (pulled from the LiveEDGAR M&A Database).
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com )
Ocassionally, we’ll be posting mesages from Bloggees and as musings from “Guest Bloggers.”
Here’s an observation from Ben Orlanski to our “We Don’t Need no Stinkin’ Signatures” posting.
Of course, Larry and I reserve the right post Bloggee messages that we deem appropriate (i.e., that are practical, show keen insight and sophistication… and otherwise make us look good)
SURPRISE FINDINGS REGARDING THE “ACCURACY OF REPS AND WARRANTIES” CONDITION IN ACQUISITION AGREEMENTS! URBAN LEGEND REGARDING BUYER’S WALK RIGHT SENT PACKING AT THE ABA NEGOTIATED ACQUISITIONS COMMITTEE MEETING IN SAN FRANCISCO!”
One section of most acquisition agreements that can control when a buyer can walk a deal, usually entitled “Accuracy of Representations and Warranties” (in M&A slang, the “bring down” section) has long been the subject of debate for a lot of reasons. One of the principal debates is whether practitioners require that the reps and warranties be correct (i) only at signing (i.e., “true when made”), (i) only at closing (i.e., “as brought down”), or (iii) at both signing and closing(i.e., “true when made and as brought down”). As an extension of our recent Deal Points Study, wherein we reviewed acquisition agreements relating to public company acquisitions of private companies with transaction values of between $25M and $150M (pulled from the LiveEDGAR M&A Database), we compiled the following statistics about when reps and warranties have to be true:
True at signing only (i.e., “true when made”): 7%
True at closing only (i.e., “as brought down”): 48%
True at signing and closing (i.e., “true when made and as brought down”): 45%
From a statistical standpoint it looks fairly evenly matched between “true at closing only” and “true at signing and closing.” Depending on which side of the buyer/seller aisle you sit these findings may be as big of a surprise to you as they were to a lot of our colleagues (and us too) on the ABA Negotiated Acquisitions Committee.
Can sellers and buyers call it a draw in the bring down arena? Hard to tell without analyzing other key features of this particular walk right. So with that teaser, tune in again over the next several days for more of these dramatic statistical findings on the all important bring down condition, including those related to “materiality” (a/k/a How wrong can the seller be?).
Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com ).
Signatures? We don’t need no stinkin’ signatures! Well… at least in NY.
So says a Fed Judge for NY in his July opinion in AIH Acquisition Corp. v. Alaska Industrial Hardware, (S.D.N.Y. July 1, 2003) as he granted specific performance in Buyer’s favor even though seller refused the definitive acq K!
After extensive due diligence and negotiation, buyer’s counsel sent the definitive K to seller’s counsel in an email saying: “Attached is the final SPA. Everyone, including the lawyers, has stated it is final without qualification. Please endeavor mightily to have the SPA executed tomorrow. Thank you for your efforts.”
At the eleventh hour, guess what – Target’s majority shareholder refused to ink it.
The Court said signature-schmignature!: “Here, the parties had more than an oral agreement. They had a complete written agreement containing all material terms in final form with signatures coming the next day as a mere formality. … It is clear from this that the agreement was — and the parties were in agreement that it was — final and therefore binding even though signatures had not been affixed.”
Would it have been a good idea for seller’s counsel to send a reply email reminding buyer’s counsel that there’s no agreement until there’s execution and delivery? Probably – but that’s easy to say with my perfect 20-20 hindsight. (Nevertheless, score one for buyer’s counsel for his/her exquisite, self-serving email!).
Have I ever been lulled into thinking that merely saying (especially in correspondence) “subject to execution” is good enough? Maybe probably.
Will I think twice about making sure all confidentiality Ks, LOIs, and the like – and even minor things like an email – clearly state that we ain’t got no deal (i.e., nothing’s legally binding) until the definitive K is executed and delivered? Yep.
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com ).
As our kickoff post, we thought we’d ponder about a subject near-and-dear to our hearts: sell-side representation.
At the risk of oversimplifying things (which, you’ll find, we have a tendency to do), buy-side engagements are relatively plain-vanilla exercises in upholding the Golden Rule: “He who has the gold, makes the rules.” More often than not, that “he” tends to be the buyer. As such, it’s pretty easy for buyer’s counsel to fend off seller’s requests with standard replies ranging from “Why would you want that? Are you trying to hide something?” to “No, you want the money or not?”
Sell-side representation is a more challenging game for us lawyers who are in search of what we’ll call seller’s “Holy Trinity” of bottom-line objectives:
(I) Get your number (i.e., a price that makes seller giddy);
(2) Get the deal closed (i.e., don’t let buyer walk and otherwise turn your company into damaged goods); and
(3) Get a good night’s sleep (i.e., worries about post-closing indemnification and purchase price adjustments).
A recent example of aggressive seller-favorable terms that we found is the recently announced purchase by Invitrogen (Nasdaq) of Molecular Probes (private). Some of the more seller-friendly terms include:
(i) A “Target Material Adverse Effect” definition with a kitchen-sink approach to carveouts – and then some;
(ii) Acquiror’s rep that Acquiror has no knowledge of any inaccuracies in Target’s reps;
(iii) Acquiror’s bring-down condition that disregards any inaccuracies in Target’s reps (x) known by Acquiror; or (y) don’t measure up to that mother-of-all definitions of Target MAE;
(iv) For indemnification purposes, a “Damages” definition that excludes special, indirect, consequential, exemplary and punitive damages, damages from lost profits and lost opportunities, and tax benefits and insurance proceeds receivable; and
(v) Anti-sandbagging limitations on Acquiror’s ability to close-and-sue for indemnification.
So which crafty firm so dares to level the playing field with an I-got-the-gold buyer? The “Notices” section lists Cooley Godward as Target’s counsel. Could the Wizard of Oz behind Target’s handiwork be none other than Rick Climan, Head of Cooley’s M&A Group as well as Chair of the ABA’s Negotiated Acquisitions Committee?
By the looks of the merger agmt, we’re pretty confident that buyer’s counsel got its pound-of-flesh, too!
Is the Invitrogen/Molecular merger agmt a “high-water mark” for sell-side representation protection? We don’t know but we’re sure putting this one in our form files ( http://www.sec.gov/Archives/edgar/data/1073431/000093639203000919/a91276exv2w1.htm )…
(Comments? Gripes? Pls feel free to email us: wilson.chu@haynesboone.com or lglasgow@gardere.com ).