M&A transactions & timeline

DD & SPA
Gerrit Jan Kleute | 19 & 26 November 2021
Introduction

 Who are we?

 Some basic concepts of M&A Transactions

 M&A transactions – the game

 M&A transactions – the player & stakeholders

 A typical M&A transaction

 Difference with a controlled auction

 Warranties and Indemnities

Who are we

 What does a firm like HHP do?

 Personal experience and roles within HHP

 What makes our work as lawyers so interesting

 What is expected of a legal assistant at HHP

M&A Transactions – the game

Drivers for M&A:

 Industry consolidation
 Focus on core business
 Scale
 Additional product range
 New markets

Legal mechanics:
 Sale and Purchase: public offer vs private deals
 Merger/Demerger

Consideration

 Cash or shares
M&A Transactions – the players & stakeholders

 Seller(s) & Buyer(s) Stakeholders :

 Corporate vs Financial Sponsor vs Portfolio
 Shareholders (sellers or
company
remaining shareholders)
 Management
 Employees
 Target
 Customers
 Stand-alone vs part of a group
 Financing Banks  Suppliers
 Government
Advisors: buy-side and sell-side  group
 Investment bankers
 Lawyers
 Accountants
 Tax advisors
 Other specialist (environment, pension, etc.)
A typical M&A transaction

 Sign confidentiality letter

 Agree letter of intent/heads of agreement
 Draft transaction documents (typically SPA, but sometimes also SHA).
Typically seller’s counsel drafts.
 Due diligence investigation by the buyer and its advisors
 Various negotiation meetings to discuss the transaction documents
 Sign transaction documents
 Satisfy the conditions precedent in the transaction documents
 Prepare completion steps (corporate resolutions, power of attorney,
payment instructions, deeds of transfer, etc.)
 Complete the transaction by transferring the shares and fund the purchase
price
 Post-completion steps (for example: amend board compositions, change
signatories to bank accounts
Difference with a controlled auction

 An auction is a carefully designed process to optimize deal value for seller;

 Auctions only work for hot assets;
 Bidders need to be prepared and able to move quickly to win in an auction process;
 In an auction bidders are negotiating with themselves more than with the seller
(mark-up of SPA is typically limited);
 Negotiated deals typically take longer to negotiate, since both parties have equal
negotiating power;
 Investment banks play a smaller role in negotiated deals (if any)
 Documents that are used in an auction that you do not typically see in a negotiated
deal:
 Process letters;
 Teaser;
 Information memorandum;
 Vendor due diligence;
 What do you think is the more interesting process for a lawyer?
Due diligence - theory

 What is due diligence (DD) ?

 When in an M&A process is the due diligence investigation conducted?
 Who provides the due diligence information? The buyer / seller?
 What is VDD? Why is VDD used sometimes?
 Why is due diligence so important?
 Basis/assumptions for the client’s business case;
 Liability for law firm if they do not spot material problems;
 How you deal with DD findings can make or break deal;
 Information included in the data room is assumed known by the buyer;
 Why is DD not as boring as you may think: you get in depth knowledge of the target
company’s business;
 What is the role of a trainee-associate at HHP in a due diligence process.
Due diligence – practice

What do you need to know before starting a DD investigation?

 What does the client want to know?
 Materiality threshold?
 Summaries or red flags?
 What are the key legal risks of the target business?
 What kind of transaction is the client proposing? Asset vs share deal?

How does it work in practice:

 100s of documents to review;
 Physical data room vs virtual data room;
 Q&A process;

What do you need to look for?

 Discussions with regulations on compliance with applicable law;
 Claim from former employees, contract parties or third parties;
 Change of control provisions for key management;
 Potential liabilities under general terms, sale agreements or other agreements
Warranties & Indemnities

Warranties are contractual statements confirming the condition of certain aspects of the target company and
its business as per a certain date.
 Example: “the Seller warrants that it holds 100% of the shares in the capital of the Company”
 Liability arises if a warranty is not true and there is damage for the buyer;
 Warranties
 provide the risk allocation;
 trigger disclosure by the seller;
 Warranties are typically backward looking;
 Statutory warranties are typically excluded.

Indemnities cover specific risks which are of particular concern to the buyer.
 Example: “ the Seller will indemnity the Purchaser for all taxes incurred by the Company prior to
Completion”
 Liability arises under the indemnity once the Company is liable to pay any taxes relation to the period
prior to Completion
 Indemnities relate to identified risks;
 Indemnities are typically relating to a period prior to completion;
 Consider: indemnity vs. purchase price adjustment?
Warranties & Indemnities (cont’d)

The difference between warranties & indemnities:

 Applicability(financial) limitations on liability;
 Effect of disclosure;
 Identified risks vs. risk allocation;

Repetition of warranties
 What does it mean?
 What is the consequence of a warranty breach after signing but before completion?

Who gives warranties and indemnities:

 Special purpose vehicle or company with established business;

Recourse:
 Ordinary claim;
 Escrow arrangement;
 Warranty insurance;
 Parent company guarantee;
 Termination?
Interplay between DD and warranties

Consider:
 the disclosed information typically qualifies the warranties;
 Disclosure of data room vs. disclosure letter;
 Disclosure standards: fair disclosure;
 Definition seller’s knowledge (actual/deemed, scope)

Watch out for:

 What about knowledge of professional advisors of buyer?
 Items disclosed in the SPA should also disclose the warranties;
 Reliance on non-written information (management-presentations);
 Reliance on forward looking information
Interplay between DD and warranties

Limitations of Liability
 Financial Limitations:
 De-minimis (individual claims/similar circumstances aggregated, not
for core warranties);
 Hurdle/threshold/basket (excess only or ground up?);
 Cap on all claims under SPA:
 Time Limitations:
 Split into, for example, (i) tax, (ii) environment, (iii) other than tax and
environment;
 No time limits for fundamental warranties;
 Claim within x days after actual/deemed discovery of breach and
start litigation within x months (unless Seller’s rights are not
affected?) after claim;
Anatomy of SPA

 Parties  Employees
 Interpretation  Transitional Services
 Sale and purchase  Restrictive covenants
 Conditions  Confidentiality and announcements
 Consideration  Costs
 Pre-completion undertakings  General
 Completion  Entire agreement
 Warranties  Assignment
 Indemnities  Notices
 Limitations  Governing law
 Language
Conditions
Starting position:
 Is simultaneous exchange and completion possible?
 In particular auction process – deal certainty is key for the Seller
 Everyone prefers a simpler SPA!

Examples of CPS include:

 Competition/anti-trust and regulatory approvals (but not in Indonesia)
 Shareholder approval
 Third party/CoC approvals and other diligence issues
 Material adverse change
 Quasi “MAC” – Breach of warranties / Breach of pre-completion
restrictions
Between Signing and Completion

Signing Completion

Mandatory CPs Financing Cp

MAC / “Quasi MAC” CPs Pre-
Warranties at Completion Undertakings Warranties repeated at
Signing Completion

Purchase Price
Adjustment / Locked Box?
(covered in later session)
Material adverse change
Buyer’s perspective – business and market MAC
…any event, circumstance or occurrence which is, or is reasonably likely to
be, materially adverse to the business, operations, assets, liabilities,
condition (financial, trading or otherwise), financial results or future
prospects of the Group taken as a whole…
Seller’s perspective
 Limit to business MAC only (e.g. loss of major customer/license)
 Stipulate financial/materiality threshold – specify impact on net assets or
net assets or net profits of the Group taken as a whole
 Exclude “future prospects of the Group”
 Carve out for acts or omissions at the request of the Buyer

Must match MAC definition in financing documents

“Quasi-MAC” CPs
Breach of warranties
“all the representations and warranties remaining true and accurate [in all
material respects] as if they had been repeated at Closing"
 Seller to watch out for:
 breach of warranties given at signing
 lack of [in all material respects] qualifier
 Repetition every day between signing and completion
 Specify materiality or specify size of claim if possible
Conditions - other practical tips

No other termination Drafting of CPs - beware Break fee/Deposit?

rights other than CPs! of:  For example, if the
 Beware of Buyer  "receipt of ... only condition relates
sneaking specific approvals in a form to the Seller's
clauses outside of satisfactory to Buyer shareholder approval,
CPs e.g. loss of in its sole discretion" Buyer may request a
material contract or break fee to cover
 Allocate clear costs
property
responsibility for
satisfaction of CPs
 Who should have the
right to waive?
Pre-completion undertakings
Restrictions on operations
 Positive undertakings to operate business in ordinary course
 Buyer's veto rights over a range of operational matters
 Can Buyer be involved in business decisions?
 Buyer's consent not to be "unreasonably withheld“
Be careful of regulatory and anti-trust limitations
Access to information/Cooperation
Seller's perspective: Carve outs to veto rights
 Ordinary course of business eg routine renewal of short term contracts

 Agreed business plan eg capital expenditure for new assets as

specifically negotiated/contemplated by parties
 Contemplated in SPA e.g pre-sale reorganization
Questions
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