Newsletter Autumn 2011.Final[1]

1. ®
A Newsletter from Shumaker, Loop & Kendrick, LLP Autumn 2011
6 Alternative M&A
Methods in
8 IT in the Current
M&A Market
12 M&A: Foreign
Corrupt
16 Cloud
Computing
18 Employment Issues in
Mergers & Acquisitions
Distressed Settings Practices Act
Dealing with Uncertainty in
Mergers & Acquisition Transactions
ed itor ’s note
ver the last two years, since the
nadir of the financial crises, M&A Recently, Shumaker has seen an increase in
transactions involving mergers, acquisitions,
activity has been on the rise. In
sales of substantially all assets, divestitures,
2010, total U.S. M&A activity rose and joint ventures (collectively, “M&A”).
to 1,933 deals from 1,116 deals in Additionally, according to The Wall Street
2009, an increase of 73%. Thus Journal (p. C1, Oct. 24, 2011), bank lending
far in 2011, overall U.S. M&A deal has returned to M&A transactions. Therefore,
volume remains healthy, with nearly we have devoted our Autumn 2011 Insights
1,000 closed transactions in the first Newsletter to highlight current M&A topics
By Julio Esquivel potentially of interest to our clients.
half of 2011, up nearly 30% from
the prior year period. This trend should continue, RegINA JOSeph
given the unprecedented amount of cash on the
balance sheets of many corporate buyers, limited
opportunities for organic growth, the increasing As a result, there are significant risks in
availability of leverage (at historically low interest attempting to buy or sell a business under
rates), and the need for hedge funds to invest current market conditions. Will the buyer be
their so-called “dry powder” or liquidate their able to obtain the financing required to pay the
portfolio investments as a result of their investment purchase price? What if there is another market
mandates. downturn that negatively impacts the seller’s
business? Will pre-closing buyer’s remorse
By Ben Hanan
Volatility in the marketplace require renegotiation or termination of the deal?
Nevertheless, significant, ongoing financial What if the seller hasn’t fully disclosed trends or
concerns remain, led by fears of a European debt events that will negatively impact the business
crisis, intransigent high unemployment, a glut of in the future? How do buyers and sellers hedge
foreclosures, the potential for a double-dip U.S. their bets and protect their interests?
recession, the recent downgrade of U.S. debt, and
our seemingly dysfunctional political system. Is it Negotiating M&A purchase agreements is, at its
any wonder the markets overanalyze every gesture core, the allocation of risks among the parties to
of Fed Chairman Ben Bernanke and jump at the the transaction. A full discussion of the various
slightest rustle? Thus, even though U.S. banks interwoven and complex considerations that go
today are better capitalized than they were in 2008 By Greg Yadley into that allocation is beyond the scope of this
and corporations are sitting on unprecedented article. Instead, we highlight below five hot
amounts of cash and GDP continues to grow (albeit topics to which buyers and sellers should pay
at a slow pace), the credit markets and, hence, the particular attention as they strike deals in this
M&A environment, remain highly volatile. uncertain environment.
continued on next page >

2. don’t skip the First step “those in a confidential relationship agreements among the parties.” If the earnout amount be paid immediately
Usually, M&A discussions begin with [AmeriPark]” and that in any letter of intent or purchase agreement rather than undertaking the risks
with the signing of a confidentiality event, discussions with Greenfield neglects to include, or contains only a There is a natural tension between related to business performance under
agreement (sometimes called a non- should have been anticipated since perfunctory, confidentiality provision, the new ownership.
the proposed Gemini financing it may be deemed to have superseded
the value a seller places on its
disclosure agreement or “NDA”).
Too often, the parties gloss over the contemplated a redemption of the NDA, leaving the parties without company and how much a buyer is hedGinG the Bet
importance of these agreements, Greenfield’s stake in AmeriPark. the benefit of the NDA’s protections. willing to pay for it. Another way for buyers and sellers to
considering them boilerplate, perhaps bridge the gap on the purchase price
even signing the form provided by Regardless of whether you agree BridGinG the pUrchase price Gap while allowing the buyer to hedge
the other party without reviewing it with the Court’s ruling, the case There is a natural tension between the its bet is to provide for a “holdback.”
with counsel. If the deal successfully highlights the need to carefully value a seller places on its company A “holdback” is simply the negotiated
closes, this will likely be a non-issue. craft confidentiality agreements. and how much a buyer is willing to portion of the purchase price which is
But when a party walks away from With whom can the parties share pay for it. This tension is elevated in an placed in escrow at closing and held
the negotiation table, a confidentiality confidential information? How is uncertain economic environment, when until the terms of the escrow have
agreement may be all the other party confidential information defined? no one knows what tomorrow may been satisfied. Typically, the holdback
has to protect its interests. Are there any exceptions? What are bring. An “earnout” is designed to serves to ensure that the buyer will be
the permitted uses of confidential bridge this gap by providing additional able to get a portion of the purchase
Take, for instance, a very recent case information? Should the agreement compensation to the seller if certain price returned to it if (a) there is a post-
out of Atlanta, where Gemini, a private also include, among other things, a post-closing targets are met. closing purchase price adjustment
equity firm, signed a term sheet to non-solicitation provision (preventing (e.g., an adjustment based on a
finance the acquisition by AmeriPark the other party from soliciting your Over the last few years, earnouts have requirement that the seller’s balance
of a competitor (Mile Hi). The employees, customers, vendors, become increasingly important in M&A sheet at closing meet certain minimum
term sheet included exclusivity and and even shareholders), a standstill transactions. According to JP Morgan, are well advised to focus on the details consideration. A cap sets a limit on requirements), or (b) the seller is
confidentiality provisions pursuant agreement (preventing the seller the value of earnouts as a percentage of earnouts during the negotiation the total earnout payable, which is required to indemnify the buyer post-
to which AmeriPark “agree[d] not to from soliciting other bids or pursuing of the total deal value rose to a new process. While the structure of an important to protect the buyer if the closing (e.g., for claims based on a
discuss this opportunity or reach any other sales opportunities during the high of 41% in 2011, compared with earnout may vary widely, some of earnout is based, for example, on a breach of the seller’s representations
agreement with any person or entity restricted period), or a provision 37% in 2010 and 25% in 2001. This is the more important issues to address multiple of EBITDA. Particularly and warranties contained in the
regarding financing for this Transaction restricting trading in securities due, in part, to the uncertain economic include: in uncertain times, financing for purchase agreement). Any portion of
or the pursuit of any sale or major (particularly important if one party environment, but also due to the fact • earnout targets (these commonly the earnout payment may not be the holdback that is not returned to the
other financing.” During the exclusivity is a public company)? Depending on that business valuations are increasing include gross sales, net income and available, or existing loan covenants buyer generally is released to the seller
period, AmeriPark abandoned the your role in the transaction and the while less debt financing is available EBITDA, but earnouts can also be might create a conflict between the at the end of the holdback period.
negotiations and began talks with one facts and circumstances, you may wish to provide the cash to pay such higher based on non-financial targets); buyer’s obligations to the seller
of its largest shareholders (Greenfield), to include an expansive or narrower prices. We expect that earnouts will • earnout period (the additional and to the buyer’s bank. A buyout Having an escrow holdback reduces
who was also the sole shareholder of definition of confidential information, continue to be a significant component payment could be a one-time event option generally entitles the buyer the buyer’s risk and, thus, can serve
Mile Hi, eventually completing the restrict the range of permitted uses of of deal compensation, at least in the or stretched over multiple years; to pay a specified amount to satisfy to increase the purchase price to the
acquisition using seller financing and the information, or insist on some or near term. the period is sometimes tied to an any remaining earnout payment seller. Of course, the seller is deprived
totally cutting Gemini out of the deal. many additional protective provisions. employment or non-compete period); obligations. This may become of the use of the holdback funds during
Gemini sued AmeriPark for breach Conceptually, earnouts seem • structure of the earnout (which could important, for example, if the buyer the escrow period and the holdback
of the exclusivity and confidentiality Once the parties have carefully straightforward. If the target company be a fixed amount or based on a decides to sell its business prior may tend to shift the parties’ respective
provisions arguing that the term “any crafted their NDA, they should be achieves certain targets following the multiple, percentage, or some other to the end of the earnout period, leverage in any post-closing purchase
person or entity” was unambiguous careful not to inadvertently supersede sale, the seller “earns” more money. formula); and since potential buyers may not be price adjustment or indemnification
and clearly covered Greenfield. or render it void when they enter But like so many things, the devil is in • caps, early buyout provisions, and interested in buying a company with dispute. Accordingly, the terms of
The court disagreed, noting that into subsequent letters of intent or the details, resulting in a high degree acceleration provisions (devices to future earnout payment obligations, the holdback, including the amount,
an exception to the confidentiality definitive purchase agreements. Often of pre-signing negotiations and post- limit the parties’ ultimate monetary particularly if they are uncapped. duration, and specific purpose and
provision contemplated that the those agreements include a provision closing disputes between buyers and risks). Conversely, an acceleration provision terms of the holdback are often heavily
transaction could be discussed with that states “this agreement sets forth sellers. Parties to M&A transactions generally requires the buyer to negotiated.
the entire understanding of the parties In many deals, the focus is on the immediately pay a fixed earnout continued on next page >
hereto with respect to the subject first three items above, but equal amount if certain specified events occur.
matter hereof and supersedes all prior attention should be given to the fourth For example, if the buyer undergoes
a change of control after closing, the
seller may prefer that a minimum
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3. According to JP Morgan, based on a neGotiatinG the oUts that Among the concessions that buyers aGreeinG Up Front on the
study of 250 publicly-disclosed M&A let a BUyer walk From a deal may attempt to obtain from sellers penalty For FailinG to close
transactions in 2010: Generally, once the parties sign an M&A are the following: Because no deal is guaranteed to close, Unfortunately, buyers and sellers
• the median percentage of the agreement they are bound to close the • Limiting pro-seller exclusions to the parties should carefully consider often fail to pay sufficient attention to
purchase price placed into a holdback transaction if the stated conditions to the definition of MAE (typical pro- their remedies should the other party
escrow was 9%; closing are satisfied. Common closing seller exclusions include changes fail to close, whether as a result of a non-
the ramifications of a failure to close
• the median duration of the holdback conditions include receipt of financing, in law or GAAP and general willful breach (e.g., the buyer’s inability when negotiating M&A transactions.
escrow was 18 months; third-party consents, and shareholder economic downturns that impact to obtain financing notwithstanding
• among transactions in which approval. However, during the pre- the seller’s industry as a whole good faith efforts) or willful breach (e.g.,
representations and warranties closing period (i.e., the period between and not the seller individually); buyer’s remorse). As was evidenced
survived closing, 83% were the signing of the M&A agreement • Shifting the burden of proof to by the wave of busted deals during the
supported by a holdback escrow to and the closing), there is a risk that the seller (which requires that the recent financial crisis, this is particularly
mitigate buyer risk; and some event may arise that materially seller establish that no MAE has important to sellers in uncertain
• 24% of escrow agreements called for negatively impacts the business of the occurred, or at least that one of the economic environments where
multiple escrow accounts to be used seller, a so-called “Material Adverse MAE exclusions is applicable); financing is uncertain and bad economic
for distinct purposes (one for general Event” or “MAE.” Examples of MAEs • Making the MAE forward-looking news can easily spook buyers and their
indemnification purposes and the include the loss of the seller’s largest (by revising the definition of an lenders and investors.
other for purchase price adjustments). customer or a fire, flood, or other force MAE so that it includes “any
majeure event that significantly impacts event which results or is reasonably Unfortunately, buyers and sellers often
As an alternative or supplement to the seller’s operations. Accordingly, expected to result either before or fail to pay sufficient attention to the
a holdback, buyers and sellers also most M&A purchase agreements state after Closing in a material adverse ramifications of a failure to close when • Specific performance if the financing equity/financial buyers require some
may wish to consider representation that one of the conditions to the buyer’s impact on the seller’s business, negotiating M&A transactions. Perhaps is available; reverse break-up fee if debt financing to pay the purchase
and warranty insurance. In general, obligation to close the transaction is that operations, assets, or prospects”); this is because neither party wishes to the financing fails (the seller has the price, and, as a result, demand financing
representation and warranty insurance the seller “shall not have undergone and think about the possibility that the deal right to force the buyer to close if closing conditions and opt for some
provides buyers with additional a Material Adverse Event” prior to • Setting the measurement period may collapse, or perhaps it is because financing is available, but if financing form of reverse break-up fee for failure
risk mitigation, particularly in closing. Because the occurrence of an (so that the determination of they are focused on what they believe is unavailable, the seller’s only to close, instead of specific performance.
situations where the holdback is non- MAE would allow the buyer to walk whether an MAE has occurred are the bigger issues (like earnouts remedy is a reverse break-up fee); In either event, with both financial and
existent or relatively small, or where from the deal without being in breach of is not judged solely on the long- and holdbacks). Nevertheless, in this and strategic buyers, of the forgoing four
sellers have imposed caps or other the agreement, MAE clauses are heavily term prospects of the seller (as the volatile market, both buyers and sellers • Pure damages (no specific categories of damages, the last
limitations on their indemnification negotiated between the parties to M&A Delaware courts tend to do), but should carefully consider their remedies performance and no break-up fee, (pure damages) is the least common.
obligations. Conversely, sellers may transactions. also on the short-term). prior to signing a definitive purchase but instead, if the buyer fails to close,
wish to purchase representation and and sale agreement. the seller can sue the buyer to recover conclUsion
warranty insurance to mitigate their Following the 2007/2008 financial its expenses and damages, which it In an uncertain economic environment,
indemnification exposure and as a meltdown, MAE clauses have Generally, the remedies available to must prove). even the plain vanilla provisions
means to exit their investment cleanly received additional attention in M&A a seller can be categorized into the in an M&A transaction are subject
and quickly. For example, a seller may negotiations. Obviously, sellers want to following four categories, but these While there is no absolute rule, the to greater scrutiny. The five areas
wish to buy insurance so that it knows limit the applicability and breadth of the remedies may be combined and remedies reflected in negotiated M&A highlighted in this article are among
exactly how much of the purchase price clause, while buyers want to strengthen modified in several fashions: purchase agreements tend to vary those that require closer attention and
it has available to pay off creditors, and clarify their ability to walk away • Specific performance (if the buyer depending on whether the buyer is a provide a means for counsel to use
limited partners, and other investors, or from the deal. Furthermore, during refuses to close, the seller can request a financial or strategic buyer and whether their creativity to help their clients
to enter into another venture, instead of the last few years, these negotiations court to force the buyer to do so); it needs debt financing to fund the negotiate and, more importantly, close
having to reserve a part of the purchase have been impacted by a series of recent • Reverse break-up fee and no specific transaction. Generally, because most deals in troubled times. While the
price for indemnification contingencies. Delaware cases in which the courts performance (if the buyer fails to close, strategic buyers do not require financing possibility of unfavorable outcomes
While representation and warranty consistently have ruled in favor of the the seller is only entitled to payment of to complete a deal (many are sitting on cannot be eliminated, by identifying
insurance has been around for several sellers and concluded that no event a negotiated fee as an exclusive remedy large cash stockpiles), most are willing and addressing the risks that are most
years, in the U.S. this insurance product had occurred that qualified as an MAE, and cannot force the buyer to close or to sign agreements without a financing critical, the parties can reduce the
is still rarely used. Still, both buyers and as defined in the various purchase seek any damages; this can be a single condition and to agree to specific impact of unforeseen circumstances
sellers may wish to explore its benefits agreements at issue. As a result, we fee or a two-tiered fee, with a higher performance should they fail and protect themselves through skillful
and costs, particularly in this economic expect that buyers will become even fee payable for a willful breach and to close. Conversely, most private negotiation of the M&A deal provisions
environment. more aggressive in negotiating MAE a lower fee payable for a non-willful discussed in this article.
clauses. breach);
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4. alternatiVe methods
Alternative M&A Methods in
Distressed Settings
METHOD DESCRIPTION KEY CHARACTERISTICS
Section 363 Sale Bankruptcy Code Section 363 provides a framework for asset sales (outside • Judicial proceeding under Chapter 11 of the Bankruptcy Code
the ordinary course) and an opportunity for interested parties to be heard. • Typically an abbreviated stay in bankruptcy
Structurally, a Section 363 Sale is similar to a traditional auction process. • Assets are transferred free and clear of liens and encumbrances pursuant
A basic Section 363 Sale includes an initial “stalking horse” bidder who to section 363(f)
negotiates and enters into a “stalking horse agreement” to purchase all, or • Purchaser is given clean title to assets and protection from successor
substantially all, assets from a Chapter 11 debtor. Through a formal and liability by federal court order
well-publicized bidding and auction process, the stalking horse agreement
hile lingering classes of creditor constituents and situation. Consequently, it is incumbent is subjected to higher and otherwise better bids by other qualified bidders
• Allows for the ability to bind non-consenting constituencies
tightness in their willingness to engage in a sale on the purchaser to strike a balance using the stalking horse agreement as a baseline. Certain protections
• Process can be expensive (debtor-in-possession financing, judicial
oversight, professional fees)
the capital process, the priority and extent of between the available opportunities are also afforded to a stalking horse bidder, including strict qualification
• Provides for the ability to “cherry pick” favorable contracts and leases
markets existing liens of secured creditors, and the attendant risks. Selecting the requirements for other qualified bidders, a break-up fee (generally between
1% and 5% of the sale price), expense reimbursement (up to a defined
and volatile expedited due diligence, and limited appropriate process is just the first step cap), and minimum overbid increments. The final purchase agreement
economic contractual protections afforded to in the journey, but it can often set the between the prevailing bidder and the debtor is subject to bankruptcy court
conditions distressed purchasers. One of the tone for the overall transaction and approval.
continue fundamental questions for potential should not be taken lightly.
to hinder purchasers in a distressed M&A
Article 9 Sale An Article 9 Sale enables a secured creditor, following a default by the debtor • Non-judicial foreclosure proceeding under applicable state law
the ability transaction is how to structure and The main procedural methods on such secured obligations, to sell all of its collateral in a “commercially • Sale must be “commercially reasonable” (process, time, place,
of many companies to refinance their implement the sale process. Most for implementing distressed asset reasonable” manner. Generally, a disposition of collateral is “commercially and other terms)
debt or recapitalize their balance sheets, distressed M&A transactions are sales include the following: (i) a reasonable” if the disposition is made: (i) in the usual manner on any rec- • Can be public or private sale process
a significant number of otherwise structured as asset deals, frequently sale pursuant to Section 363 of the ognized market; (ii) at the price current in any recognized market at the time • Typically discharges junior liens, but does not afford the “free and clear”
of the disposition; (iii) in conformity with reasonable commercial practices protections of a Section 363 Sale
fundamentally sound companies are enabling a purchaser to “cherry pick” Bankruptcy Code (a “363 Sale”); among dealers in the type of property that was the subject of the disposition; • Executed quickly and inexpensively as compared to Section 363 Sale
financially distressed to the extent that select assets and leave behind certain (ii) a sale pursuant to Article 9 of the or (iv) after approval in a judicial proceeding, by a creditors’ committee, • More likely to result in diminished going concern value
a sale of the company, or substantially liabilities of the existing business. Uniform Commercial Code (an “ Article or representative of creditors. • More limited notice requirements as compared to Section 363 Sale
all of its assets, is the only viable 9 Sale”); (iii) a sale in connection with a
alternative. As a While the sale of distressed assets receivership; and (iv) an
result of ongoing under a conventional bankruptcy assignment for the benefit of creditors
A receivership is a type of judicial insolvency proceeding involving the appoint- • Judicial proceeding outside Chapter 11
economic woes, proceeding pursuant to Chapter 11 (an “ABC”). The following table Receivership
ment of a “receiver” to administer the assets of a company. A receiver may • Expedited time frame for sale
significant M&A of the Bankruptcy Code is largely a contains a brief summary of each of the run the company in order to maximize the value of the company’s assets, sell • Provides protection from waste or deterioration of underlying collateral
opportunities relic of the past due to the high costs aforementioned methods and certain the company as a whole, or sell part of the company and close unprofitable • More costly option because of judicial oversight
continue to abound and the protracted nature of such key characteristics of each method. divisions. • Assets not transferred free and clear of all liens
for strategic and proceedings, the methods described • Like a bankruptcy proceeding, a receivership forces creditors into a
single forum
financial buyers below offer potential purchasers
alike in the significant opportunities, albeit
distressed M&A with a somewhat heightened level Assignment for An ABC is a type of non-judicial insolvency proceeding governed by state • Non-judicial proceeding governed by state law rather than federal
market to fuel of risk. However, determining the law rather than federal bankruptcy law. An ABC typically involves a contract bankruptcy law
the Benefit of
business growth – especially where such appropriate structure and process for where a troubled entity transfers legal and equitable title to a third party • Generally less expensive than a Section 363 Sale
Creditors
assets can frequently be purchased for distressed M&A transactions is not a assignee in trust. The assignee then conducts an orderly liquidation of the • Typically requires shareholder approval
assets (either piecemeal or in bulk) and distributes proceeds to the assignor’s • Unlike a Chapter 7 trustee, who is randomly appointed from an approved
pennies on the dollar. “one size fits all” endeavor. Rather,
creditors based on the priorities established under applicable law. panel, assignee is appointed by the company
each transaction is unique and must be • Contracts and leases cannot be assigned without required consents
However, the distressed M&A landscape assessed based upon the specific facts • Assets not transferred free and clear of all liens (only known liens)
is vastly different from that found and circumstances of the particular • Risk of subsequent involuntary bankruptcy filing by unhappy creditors
in a conventional M&A transaction. (requires 3 or more unsecured creditors)
• Generally an event of default under most contracts
Potential purchasers in distressed M&A
transactions must consider a variety of
distinct issues, including the need and
amount of bridge financing to complete
a sale process, the relationship between
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5. dUe diliGence
IT in the Current M&A Market
&A activity appears In early stage planning, the Acquirer In conducting intellectual property An Acquirer should also keep in law may not be facially evident. Share Moreover, rights under an exclusive
to be returning should identify its immediate business due diligence, a lawyer will focus on mind that express or implied licenses purchases generally do not trigger license may be viewed differently
to, and may even objectives (i.e., to acquire new the intellectual property rights, rather might be granted in agreements that non-assignment clauses , but may be than non-exclusive rights. Other
exceed, levels seen technology, new or complementary than the subject matter of those rights. are not titled as license agreements, blocked by an express change of control issues to consider are the existence of
in the middle of the products, employees, technical Intellectual property rights are patents, such as distribution, manufacturing, provision or in a “sham” transaction noncompetition commitments, most
last decade, if the knowledge, trademarks, channels, copyrights, trademarks, and trade development, joint venture, consulting, specifically intended to assign a favored nations obligations, and open
effects of the financial sources, or other intellectual property secret rights. The subject matter of such and settlement agreements. license. Similarly, a reverse merger source software complications.
meltdown do not rights), as well as its long-term strategic rights includes, but is not limited to, (including a reverse triangular merger)
continue to haunt us. goals. To accommodate a short-term software, semiconductor designs, Critical items to be examined are in which the licensee survives does A consulting firm found that, while
As one commentator exit strategy, for example, the acquired product specifications, methods, the chain of title of owned assets and not usually trigger a non-assignment 50 to 60 percent of its clients’ M&A
has noted: intellectual property assets might be processes, documentation, etc. In short, the assignability clauses of licensed clause. However, a merger in which activity was intended to capture
“If 2010 was the year in which assigned to the same subsidiary that any product, invention, idea, material, assets. Common examples of chain of the licensee does not survive does synergies related to technology,
mergers and acquisitions got back acquires title to the tangible assets, in or information may be protectable title problems include (a) ineffective trigger a non-assignment clause. As most technology issues were not
off the mat, 2011 could be the year in order to simplify a future divestiture, under intellectual property laws. A assignments of rights under “work one court has explained, “[a] transfer fully addressed during the diligence
which it starts throwing haymakers. rather than assign the intellectual single asset might include multiple made for hire,” because legal tests is no less a transfer because it takes process or post-deal planning. An
Global M&A has totaled $309 billion property to a subsidiary whose sole intellectual property assets or subject were not met, (b) lack of consideration place by operation of law rather than Acquirer that prioritizes and focuses
since January 1, according to data purpose is to own all the affiliated matter from a legal perspective. For in invention assignments, (c) lack of by a particular act of the parties. The its technology and intellectual
from Thomson Reuters. That’s a 69% entities’ intellectual property rights. example, proprietary software (a) may specificity with respect to assignment merger was effected by the parties and property due diligence from the
jump over the same period in 2009, Additionally, the scope, and thus the be copyrightable as a whole, (b) may documents (particularly with catch all the transfer was a result of their act planning stages of a deal will no
and represents the busiest start since expense, of due diligence should be include algorithms, code, methods or phrases such as “all rights necessary” for of merging.” Since judicial decisions doubt recover more value, mitigate
2000.” weighed against the transaction’s processes that might be independently a particular purpose or license), and (d) turn on a transaction’s facts, there are risks, and achieve greater goals. This
strategic importance. Although patentable, (c) may include internal failure to grant the licensee a right to decisions contrary in result, pointing to is particularly true if the Acquirer’s
In the new era, key characteristics of M&A expensive, due diligence is crucial to designs and internal documentation sue third parties for infringement. the intellectual property subject matter, key information technology
activity have changed. At an ever-increasing the discovery of “landmines.” that constitute trade secrets, even For each significant license, the the fine points of the applicable state personnel are involved in the early
pace, transaction if not patentable, and (d) may well Acquirer should consider: (1) Does merger statute, the federal preemption planning stage, in coordination
value will derive If a transaction fails to close, the be associated with brand names or the license agreement contain any deference, specific licensure provisions, with the Target’s counterparts, since
from information Acquirer’s employees might retain their logos that constitute trademarks. The provisions regarding assignment, and equitable considerations, such discovered information might be too
technology. Yet, knowledge, gleaned during diligence, distinction between rights and subject change of control, and similar issues? as whether the subject matter will be technical to be properly interpreted
with tighter access of the Target’s valuable proprietary matter is also important to help the (2) Do such restrictions apply, given owned by a competitor. in a legal review. Thus, the Acquirer
to financial markets, information. The Acquirer could be left Acquirer remain focused on the positive the contemplated structure of the may gain a superior bargaining
Acquirers face little at risk for misuse of such information, or value and the negative or limitations of deal? (3) Outside of the transaction Governing law might contradict the position in negotiating meaningful
room for error. Since such as claims for misappropriation intellectual property. Acquirers should agreement, what rules govern the license agreement or itself be unclear. representations, warranties, and
studies have shown of the trade secrets of the Target or its avoid focusing only on the positive or transfer of this licensed asset? Whether For example, some rights are governed indemnifications that address
that many M&A competitors, as well as an increased value of intellectual property, while a license contains restrictions is, of by federal common law (e.g., patent identified intellectual property risks.
deals fail to achieve risk of treble damages for patent ignoring the negative or limitations, such course, evident from examining the licenses and copyrightable subject
their primary goals, infringement, if knowledge obtained as infringement or misappropriation of text, although provisions that indirectly matter), while other rights are governed
parties now pay more attention to diligence, during diligence serves as the basis for third-party intellectual property rights, affect assignment should be considered. by state law (e.g., trade secrets), and
which, during times of intensive dealflow, a “willfullness” finding. Therefore, which may be derived, for example, Whether the transaction structure some rights involve both federal and
was often relegated to junior associates as a the Acquirer should enter into a from title defects at any point in the constitutes an assignment or change state law (e.g., trademark licenses).
mere checklist item. Thus, with technology nondisclosure or standstill agreement chain of ownership or from prohibitions in control under the agreement’s
becoming increasingly important, with the Target that addresses on assignment in present or prior definitions (or lack thereof) or governing
technology due diligence is a top priority. permitted use of disclosed information, transactions.
as well as permitted recipients.
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6. dUe diliGence
would be harmed if a transaction were
consummated. A CFIUS review for a
Selected Regulatory transaction that could result in foreign
control of a U.S. entity or assets may be
voluntarily initiated by any transaction
Approvals party. However, CFIUS has the power to
unilaterally initiate a transaction review.
31 C.F.R. § 800.401. A CFIUS review can
last up to 30 days (31 C.F.R. § 800.404),
but may be extended for another 45 days
ergers, sales of make a second request for information the potential for expansion into new if CFIUS determines further investigation
substantially all or initiate other investigation, products or geographic markets. Item is required (31 C.F.R. 504). If CFIUS
assets, and similar which could significantly delay the 4(d) now requires three additional types concludes that national security is
transactions in transaction or require its restructuring. of documents that might not have been threatened, it makes a recommendation
highly regulated Thus, compliance with HSR adds captured by Item 4(c): for enforcement to the President, who has
industries, such considerable expense to a transaction. 15 days to act on the recommendation.
as financial Generally speaking, transactions that • “Confidential Information Since national security is not defined, the
institutions, are subject to HSR compliance are Memoranda” (or any equivalent
Federal regulators have had the power question of whether CFIUS is applicable
frequently large transactions (e.g., if the acquiring document, not including ordinary under “Exon-Florio” for decades to derail rests largely on the question whether
require specific person will acquire aggregate total course documents and/or financial a foreign party will obtain “control”
regulatory amount of voting securities or assets
a transaction in the interests of national over the U.S. entity or assets. Here too,
data) that specifically relate to the sale
approvals. Significant transactions in in excess of a threshold, which at the of the acquired entity or assets and security. however, the CFIUS requirements are
non-regulated industries must also present date is $66 million), although produced up to one year before the unclear, because regulations adopted
consider the possibility of regulatory there are alternate thresholds that could date the notice is filed. by the Treasury Department include
approvals under certain circumstances. ensnare large entities. On August 18, an open-ended definition of “control,”
Antitrust Update: For many decades, remedies are valuable for enabling
This article will highlight a few 2011, new HSR Rules became effective • Studies, surveys, analyses, and which can encompass different types
monopolistic and anticompetitive it to preserve a merger’s potential
instances. that made significant changes to the reports prepared by investment of influence by the foreign party. For
transactional behavior has been subject efficiencies, while remedying the
HSR Premerger Notification Rules and bankers, consultants, or other third example, in 2008, CFIUS raised concerns
to the scrutiny of regulators under perceived competitive harm. Common
HSR: Transactions meeting certain the Premerger Notification and Report party advisors for the purpose of about an acquisition proposed by
federal and state laws. On June 17, 2011, forms of conduct relief are firewall, non-
thresholds will be subject to the Hart- Form (the “HSR Form”), that may evaluating or analyzing market Bain Capital Partners and Huawei
the DOJ updated its Policy Guide to discrimination, mandatory licensing,
Scott Rodino Antitrust Improvements substantially increase the burden placed shares, competition, competitors, Technologies of 3Com Corp. Based on
Merger Remedies, which is located at transparency, and anti-retaliation
Act of 1976, on filing parties, particularly private markets, potential for sales growth, or press reports, it appears that CFIUS’s
http://www.justice.gov/atr/public/ provisions, as well as prohibitions on
as amended equity and hedge funds having diverse expansion into product or geographic concerns focused upon a 3Com
guidelines/272350.pdf. In the Guide, certain contracting practices. The Guide
(“HSR”), which is portfolio investments. Additionally, markets that specifically related to the business unit that supplied certain
the DOJ stresses that its review is fact shows a new propensity on DOJ’s part
administered by manufacturers must now provide sale of the acquired entities or assets, security technology to U.S. Government
specific and that, through a careful to create innovative remedies, as well as
the Federal Trade revenues and NAICS codes for each which were produced up to one year agencies. Being unable to restructure
application of legal and economic to develop a post-transaction monitoring
Commission product manufactured outside the U.S. before the date the notice is filed. the transaction to CFIUS’s satisfaction,
principles, its remedies are designed process to ensure that the remedies are
(“FTC”) and but sold in or into the U.S. the parties announced the termination
to preserve competition, not to protect enforced.
the Antitrust • Studies, surveys, analyses, and of the transaction in March 2008. To
individual competitors. Typically,
Division of the The HSR Form, in Item 4(c), previously reports evaluating or analyzing commentators, a surprising aspect of this
remedies are viewed as having either National Security: Federal regulators
U.S. Department required the reporting person to synergies and/or efficiencies matter was that Huawei would only have
structural or conduct provisions. A have had the power under “Exon-Florio”
of Justice submit a number of attachments, prepared for the purpose of obtained a 16.5% stake in the transaction,
structural remedy generally involves for decades to derail a transaction in the
(“DOJ”). If HSR including documents created by or for evaluating or analyzing the with an option of purchasing another
the sale of physical assets or requiring interests of national security. In recent
applies, the parties must submit notices officers or directors of the reporting acquisition. 5% stake, and receiving 3 of 11 board
that the merged firm create new years, that power has been enhanced
on HSR forms to both the FTC and person that were prepared for the members. (Reported in 11 Mergers &
competitors through the sale or licensing through a review process under the
DOJ, triggering a waiting period that purpose of evaluating or analyzing Acquisitions Law Report No. 14, p. 267).
of intellectual property rights. A conduct Committee on Foreign Investment in
must expire or be terminated before the transaction with respect to market
remedy usually entails provisions that the United States (“CFIUS”). CFIUS
the parties may consummate the shares, competition, competitors,
prescribe certain aspects of the merged is an interagency committee, chaired
transaction. The reviewing agency may markets, potential for sales growth, and
firm’s post-consummation business by the Secretary of the Treasury, that
conduct. The DOJ believes that conduct evaluates whether national security
www.slk-law.com 11

7. dUe diliGence dUe diliGence
Foreign Corrupt Practices Act Withdrawal Liability from the
n 1977, as a response to
Employer’s Perspective
reports of bribery of foreign
government officials by U.S.
companies, Congress adopted
the Foreign Corrupt Practices liability that may a collective bargaining agreement. In employer’s ability to preserve its right
Act (the “FCPA”). The FCPA easily exceed the event that the employer ceases to to dispute any aspect of the demand
contains two primary parts: hundreds of thousands have an obligation to contribute to a begins to expire.
(1) an anti-bribery provision of dollars, extends multiemployer defined benefit pension
that prohibits corrupt beyond normal plan (for example, a termination of the An employer has the right to “request
payments to foreign officials to corporate entity collective bargaining agreement), the a review” within 90 days of the date of
obtain or retain business, and protections, bears no employer must pay its proportionate its receipt of a demand for payment of
(2) accounting and internal intuitive relation to share of unfunded vested benefits (the withdrawal liability. The employer may:
control requirements. historical monthly difference between the plan’s assets
1. Ask the plan to review any specific
obligations toward and the present value of accrued vested
matter relating to the determination
In recent years, FCPA investigations and the liability, and has benefits) to the plan as “employer
of the employer’s liability and the
enforcement actions by the Department only a 90 day period to challenge any withdrawal liability.” In addition, in
schedule of payment;
of Justice and the Securities and An understanding of the FCPA will help aspect of the liability before all rights some circumstances, a reduction in
Exchange Commission have increased companies to implement certain and ability to dispute the liability are an employer’s contributions over a 2. Identify any inaccuracy in the
dramatically. The penalties for FCPA lost. This is an period of years can cause a “partial determination of the amount of the
violations are stiff, including fines of up procedures and processes... accurate, though withdrawal” with a proportionate unfunded vested benefits allocable to
to $2 million for violations of the anti- starkly worded, assessment of liability. With the the employer; and
bribery provision and up to $25 million description of substantial decline in the value of
withdrawal 3. Furnish any additional relevant
for violations of the accounting and investments over the past several years
liability for information to the plan.
internal control requirements. To detect any potential FCPA violations by the target company regarding combined with reduced contributions,
of a target company, a company should FCPA compliance, a termination employers many multiemployer defined benefit
who cease a An employer’s request for information
The FCPA may conduct a thorough due diligence right under certain circumstances pension plans now have, and must
contribution about the assessment, or merely stating
be applicable process, including assessing the and indemnification of any damages collect, withdrawal liability from
obligation to a that it disagrees with the liability
to companies corruption level of the countries where resulting from a breach of the withdrawing employers for the
multiemployer assessment, is not a request for
who merge the target company does business, agreement. first time. The assessed amounts of
defined benefit review. If the employer fails to “request
with or acquire reviewing the target company’s withdrawal liability are often a
pension a review” within the 90 day period, the
another company. FCPA compliance program, if any, An understanding of the FCPA as it surprising and shocking discovery for
plan. Failure to understand and act employer is precluded from challenging
Generally, when a and inspecting the target company’s relates to mergers and acquisitions will the employer.
on significant developments and the assessment, amount, or any aspect
company merges accounting and internal controls. help companies to implement certain
hard statutory deadlines can lead to of the demanded withdrawal liability in
with or acquires procedures and processes to protect A plan has the obligation to notify an
irreversible consequences for employers. any venue, including any defense to a
another company, Even if such due diligence review them from unwillingly assuming employer “as soon as practicable” after
subsequent collection suit. Employers
it assumes the does not uncover any FCPA violations, FCPA-related liabilities. a withdrawal of the amount of the
“Employer withdrawal liability” is can make the mistake of issuing a
liabilities of that a company should incorporate into employer’s withdrawal liability, provide
a statutory obligation imposed on response in the form of a denial of
company, including the liability for a merger or purchase agreement a schedule of monthly or quarterly
an employer that contributes to a liability or simple refusal to pay without
FCPA violations. language to protect itself against installment payments amortized over a
multiemployer defined benefit pension invoking their statutory right to a
the possibility of assuming a FCPA set period of time with interest, and to
plan, generally as a negotiated benefit review of an assessment of withdrawal
violation. Such language may include demand payment in accordance with the
for unionized employees pursuant to liability, often mistakenly believing
certain representations and warranties schedule. Immediately upon receipt, the
that they may advance a defense in an
anticipated suit by the plan.
continued on next page >
www.slk-law.com 13