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 ).