Post on 16-Sep-2014
KAYE SCHOLER LLP
“What’s Market”
2008 LBO Legal Issues Survey
This presentation contains Attorney Advertising.
2
Basis of Survey
Survey criteria:
Acquisitions by Private Equity Funds of privately held
businesses
Acquisitions funded with debt under Rule 144A that were
later registered under the Securities Act of 1933, as
amended, on Form S-4
Agreements entered into from January 1, 2002 through
June 1, 2007
3
Private Equity Sponsor Groups
Apollo Management, LP Bain Capital Berkshire Hathaway Inc. The Blackstone Group Bruckmann, Rosser, Sherrill & Co. The Carlyle Group Castle Harlan, Inc. Caxton - Iseman Capital CCMP Capital Advisors Cerberus CSFB Private Equity Cypress Group DLJ Merchant Banking Fenway Partners, Inc. GS Capital Partners (Goldman Sachs) GTCR Golder Rauner, LLC H.I.G. Capital LLC Jefferies Capital Partners
J.W. Childs Associates Kohlberg & Co. Madison Dearborn Partners Merrill Lynch Global Private Equity Morgan Stanley Capital Partners Onex Corporation One Equity Partners Ripplewood Holdings Summit Partners Texas Pacific Group Thoma Cressey Equity Partners Thomas H. Lee Partners Veritas Capital Management Vestar Capital Partners Warburg Pincus LLP Welsch Carson Anderson & Stowe Wind Point Partners
Including:
KAYE SCHOLER LLP
Purchase Price
5
Range of Purchase Prices
Year # of Deals
Range of
Purchase Prices Average
2007 3 $2,162-$4,152 M $3,207 M
2006 11 $125-$3,703 M $965 M
2005 16 $180-$2,300 M $775 M
2004 35 $125-$3,900 M $906 M
2003 21 $165-$4,200 M $814 M
2002 9 $90-$4,300 M $1,222 M
Total 95 $90-$4,300 M $973 M
The transactions included in the survey range in value as follows:
6
Range of Purchase PricesWhat are the Size of the Deals Included in this Survey?
0
2
4
6
8
10
12
14
16
18
20
Up to $250 Million $250 Million to $1 Billion Over $1 Billion
2
4
33
14
4
3
20
12
3
9
4
3
5
3
0 0
3
2002 2003 2004 2005 2006 2007
KAYE SCHOLER LLP
Purchase Price Adjustments
8
Purchase Price AdjustmentWhat Percentage of Deals Utilized a Purchase Price Adjustment?
No Adjustment13%
Includes Adjustment87%
9
Typical Purchase Price AdjustmentsHow Often are the Most Typical Purchase Price Adjustments Used?
0%
10%
20%
30%
40%
50%
60%
70%
Income Statement
Inventory Net Working Capital
Net Worth Other
8%
3%
62%
6%
43%
10
One-Way or Two-Way?Was Purchase Price Adjustment One-Way or Two-Way?
One-Way22%
Two-Way78%
KAYE SCHOLER LLP
Indemnification
12
Cap on General Indemnity ClaimsExample
The Buyer Indemnified Persons will not be entitled to recover
more than an aggregate of $xx,xxx,xxx (the “Cap”) from the
Sellers with respect to all Losses indemnifiable pursuant to this
Section.
13
Cap on General Indemnity ClaimsWhere Do Cap Amounts Typically Fall?
No Survival19%
Cap Less Than Purchase Price
78%
Cap Equal To Purchase Price
2%
Unlimited Cap1%
14
Cap on General Indemnity ClaimsWhat is Average Cap as a Percentage of Purchase Price? (Excludes No Survival and Unlimited Cap Deals)
0%
5%
10%
15%
20%
All Years All Deals
16.4%
14.1%15.1%
16.6%
up to $250 million $250 Million to $1 Billion over $1 Billion
15
Adjusted Cap on General Indemnity ClaimsAdjusted to Exclusive Any Cap Over 20%
0%
5%
10%
15%
All Years All Deals
8.2%
7.1%
8.20%
11.2%
up to $250 million $250 Million to $1 Billion over $1 Billion
16
Cap on General Indemnity Claims By YearWhat Is Average Cap As a Percentage of Purchase Price in Each Year? (Excludes No Survival and Unlimited Cap Deals)
0%
5%
10%
15%
20%
25%
30%
2002 & 2003 2004 2005 2006 & 2007
21.0%19.5%
7.4%
14.6%
12.4%
17.6%
10.3%
13.7%
11.9%
14.5%
25.2%
16.0%
up to $250 million $250 Million to $1 Billion over $1 Billion
17
Adjusted Cap on General Indemnity Claims By YearAdjusted to Exclude Caps above 20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2002-2003 2004 2005 2006-2007
5.3%
4.5%
7.4%
14.6%
4.8%
9.0%
7.7%
6.9%
11.2%
9.3%9.6%
14.0%
up to $250 million $250 million + to 1 Billion over 1 Billion
18
Escrow To Support Indemnification(Excludes No Survival Deals)What Percentage of Deals Include an Escrow or Holdback to Support Indemnity Claims?
Escrow58%
Holdback4%
No Credit Support
38%
19
Carve-Outs From Indemnity CapsWhat are the Typical Carve-outs from the Cap on Indemnification?
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Assumed Liabilities ERISA No Brokers Other
7%
18%
14%
45%
31%
34%
45%
20
Indemnity Threshold (“Basket”)Example of Deductible and Dollar-One Thresholds
Deductible. Sellers will have no liability (for indemnification
or otherwise) with respect to the matters described in clause
(d) of Section 10.2 until the total of all Damages with respect
to such matters exceeds $___________, and then only for the
amount by which such Damages exceed $________.
Dollar-One. Sellers will have no liability (for indemnification
or otherwise) with respect to the matters described in clause
(d) of Section 10.2 until the total of all Damages with respect
to such matters exceeds $___________ but then shall be liable
for all such Damages.
(Source: ABA Model Stock Purchase Agreement)
21
Dollar One vs. DeductibleWhat Percentage of Deals With a Threshold Include Dollar One or a Deductible?
Deductible90%
Dollar One10%
22
Thresholds As Percentage Of Purchase PriceHow Large Are Thresholds As a Percentage of Purchase Price?
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
Up To $250 Million $250 Million to $1 Billion
Over $1 Billion Total Average of All Deals
0.6%
0.7%
0.9%
0.8%
23
Mini-Basket What Percentage of Deals Include a “De Minimis” Amount for Each Indemnifiable Claim?
Includes Mini-Basket65%Does Not Include
Mini-Basket35%
24
Materiality Read OutWhat Percentage of Deals “Read Out” Materiality from Indemnification Claim?
Materiality Read-Out
20%
Materiality Threshold Must Be Satisfied
80%
25
Survival of General Indemnity ClaimsHow Long is the Survival Period for General Indemnity Claims?
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
No Survival Less than 12 Months
12+ - 18 Months 18+ - 24 Months More than 24 Months
Unlimited
20%
23%
39%
10%8%
1%
26
Survival Carve-outsWhat are the Typical Survival Carve-outs?
0%
10%
20%
30%
40%
50%
60%
Taxes ERISA Environmental Title Power & Authority Capitalization
47%
18%
4%
10%
8% 8%
4%
8%
1%
35%
49%
45%
29%
25%
56%
10%
6% 6%
Statute of Limitation Unlimited Specified Number of Years
79% 51% 61% 56% 64% 60%
27
Stand Alone IndemnitiesWhat are the Typical Stand-Alone Indemnities?(Excludes No Survival Deals)
Other Stand Alone Indemnities Included: non-assumed liabilities, brokers’ fees, employee matters, title defects, and particular litigation
0%
10%
20%
30%
40%
50%
60%
Environmental ERISA Taxes Other
28%
7%
57%
20%
28
Set-Off for Tax Benefits of Indemnity ClaimWhat Percentage of Deals Include a Reduction or Set-Off for Tax Benefits Related to an Indemnity Claim?
Does Not Include a Tax Reduction/Set-Off
40%
Includes a Tax Reduction/
Set-Off60%
29
Set-Off for Insurance ProceedsWhat Percentage of Deals Include a Reduction or Set-Off for Insurance Proceeds Received for Claimed Item?
Does Not Include an Insurance
Reduction/Set-Off18%
Includes an Insurance Reduction/Set-
Off82%
30
Indemnification as Exclusive RemedyWas Indemnification the Exclusive Remedy for Most Types of Claims?
Yes84%
No16%
31
Included Types of DamagesWhat Types of Damages are Specifically Included in Indemnification?
0%
5%
10%
15%
20%
25%
Consequential Damages
Dimunition of Value/Multiplier
Incidental Damages Lost Profits Other Similar Damages
Punitive Damages Special Damages
5%
7%
5%
4%
22%
3% 3%
32
Excluded Types of DamagesWhat Types of Damages are Explicitly Excluded from Indemnification?
0%
10%
20%
30%
40%
50%
60%
70%
Consequential Damages
Dimunition of Value/Multiplier
Incidental Damages Lost Profits Other Similar Damages
Punitive Damages Special Damages
54%
20%
37%
25%
43%
68%
46%
33
Alternative Dispute Resolution
Binding Arbitration
79%
Mediation14%
Mediation Then Binding
Arbitration7%
What Percentage of
Deals Utilize ADR
Mechanisms?
What Type of ADR
Did those Deals Use?
Includes ADR15%
Does Not Include ADR85%
34
Private Equity Sellers - Indemnification Issues(As a Percentage of Enterprise Value)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Escrow Cap Basket
3.5%
8.4%
0.7%
Average
Survival:
17 Months
KAYE SCHOLER LLP
Closing Conditions
36
Bring-Down of Representations and Warranties As Closing ConditionExample - MAE Bring Down
All of Sellers’ representations and warranties in this
Agreement must have been accurate in all material respects
as of the date of this Agreement, and must be accurate in all
material respects as of the Closing Date as if made on the
Closing Date, without giving effect to any supplement to the
Disclosure Letter; provided, however, that this condition shall
be deemed to have been satisfied unless the impact of all
inaccuracies of representations and warranties (without giving
effect to qualifications of materiality or similar qualifiers)
would be reasonably likely to have a Material Adverse
Effect.
37
Bring-Down of Representations and Warranties as Closing ConditionExample - Materiality Bring-Down (No Double-Counting)
Each of the representations and warranties made by the
Shareholders in this Agreement that are not qualified as to
materiality or Material Adverse Effect shall be true and
correct in all material respects and each of the
representations and warranties of the Shareholders that are
qualified as to materiality or Material Adverse Effect shall be
true and correct in all respects.
38
Bring-Down of Representations and Warranties as Closing ConditionWhat Are Typical Bring-Down Formulations?
When Made? Level of Materiality?
Only At Closing44%
At Signing and Closing55%
Other1%
Materiality Bring-Down9%
Materiality Bring-Down (No Double-Counting)
32%MAE Bring-Down48%
Flat Bring-Down8%
Other3%
39
MAE Bring Down Broken Down by YearsWhat % of Deals in each Year Use MAE Bring Down?
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2002-2003 2004 2005 2006-2007
60.0%
43.0%
56.0%
71.0%
40
Express No MAC Closing Condition Example
Since the date of this Agreement, there shall not have
occurred any condition, change or event that has had or
would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
41
Express and “Back-Door” MACsWhat Percentage of Deals Use Express MAC Closing Condition or So-called “Back-Door MAC”?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Express MAC Closing Condition
MAC Representation ("Back-Door" MAC)
Both MAC Condition & MAC Rep
Neither MAC Condition nor MAC Rep
73%
81%
60%
6%
42
“Material Adverse Effect” or “Material Adverse Change”Example
“Material Adverse Effect” means any change, development,
effect or condition that, individually or in the aggregate, has
had, or is reasonably likely to have, a material and adverse
effect on the business, properties, assets, liabilities, condition
(financial or otherwise), prospects or results of operations of
the Company and its subsidiaries, taken as a whole;...
43
Material Adverse EffectWhat Percentage of Deals with MAE Definition include the Term “Prospects”?
"Prospects" Included
14%
"Prospects" Not Included
86%
44
Material Adverse Effect “Carve-Outs”Example
...provided, however, that none of the following shall be
taken into account in determining whether there has been a
Material Adverse Effect: (1) the effects of changes that are
generally applicable to the industry and markets in which the
Company and its subsidiaries operate, (2) the effects of
changes that are generally applicable to the United States
economy or securities markets or the world economy or
international securities markets or (3) any effects on the
employees, suppliers, licensors or customers of the Company
and its subsidiaries directly resulting from the public
announcement of this Agreement, the transactions
contemplated hereby or the consummation of such
transactions;
45
MAE Carve-OutsWhat are the Typical Carve-outs to the Material Adverse Effect Definition?
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Acts of God Terrorism War Compliance with the Terms of the Agreement
The announcement or pendency of the
transactions contemplated by the
agreement
Changes in GAAP Conditions arising out of changes in laws or
regulations
Changes In Target's Industry
General economic or business conditions
11.60%
37.90%
41.10%42.10%
54.70%
34.70%
40.00%
71.60%
81.10%
46
MAE Carve-Outs By YearWhat are the Trends for MAE Carve-outs?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
27%
30%
43%
10%
50%
67%
31%
40%
54%
43%
77%
86%
56%
44%
56% 56%
88% 88%
57%
71%
79% 79%
86%
93%
2002-2003 2004 2005 2006-2007
Terrorism Compliance with the
Terms of the Agreement
The announcement or pendency
of the transactions contemplated
by the agreement
Conditions arising out of
changes in
lows or regulations
Changes in Target’s industry General economic
or business conditions
47
Financing OutsWhat Percentage of Deals Include a Condition that Buyer Receives Financing?
Doesn't Include Condition
22%
Includes Condition
78%
48
Legal Opinion ConditionWhat Percentage of Deals Require the Delivery of a Buyer’s or Seller’s Counsel Legal Opinion?
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Delivered by Buyer's Counsel Delivered by Seller's Counsel
27.4%
49.5%
49
Financing Outs Break down by Years
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 & 2003 2004 2005 2006 & 2007
27% 29.0%
19.0%
0.0%
73.0% 71.0%
81.0%
100.0%
Does Not Include Condition Includes Condition
KAYE SCHOLER LLP
Seller’s and Company’s Representations and Warranties
51
No Undisclosed Liabilities RepresentationExample
Except as set forth in the Disclosure Letter, the Acquired
Companies have no liabilities or obligations of any nature
(whether known or unknown and whether absolute, accrued,
contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the Balance Sheet or the
Interim Balance Sheet and current liabilities incurred in the
Ordinary Course of Business since the respective dates
thereof.
(Source: ABA Model Stock Purchase Agreement)
52
No Undisclosed Liabilities RepresentationWhat Percentage of Deals include a “No Undisclosed Liabilities” Representation?
What portion is
qualified by knowledge?
Does Not Include Rep8%
Includes Rep92%
Does Not Include Knowledge Qualifier
89%
Includes Knowledge Qualifier
11%
53
No Undisclosed Liabilities RepresentationWhat are Typical Carve-Outs from No Undisclosed Liabilities Representation?
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
77.90%
38.90% 37.90%
78.90%
33.70%
55.80%
Carve-Out for
Liabilities
Reflected/Reserved
Against
Immaterial
Liabilities/
Liabilities Not Rising
to MAE
Limited to
GAAP LiabilitiesLimited to Liabilities
Incurred - Ordinary
Course
Other Set Forth
on Schedule
54
Full Disclosure (“10b-5”) RepresentationExample
No representation or warranty of Sellers in this Agreement
and no statement in the Disclosure Letter omits to state a
material fact necessary to make the statements herein or
therein, in light of the circumstances in which they were made,
not misleading.
(Source: ABA Model Stock Purchase Agreement)
55
Full Disclosure (“10b-5”) RepresentationWhat Percentage of Deals include a “Full Disclosure” (“10b-5”) Representation?
Does Not Include Rep
81%
Includes Rep19%
56
No Other RepresentationsExample
Except for the representations and warranties of Seller
contained in this Agreement and Seller's Schedules, Seller
makes no express or implied representation or warranty to
Buyer.
57
No Other RepresentationsWhat Percentage of Deals include a “No Other Representation” Rep?
Does Not Include Rep32%
Includes Rep68%
58
Knowledge DefinitionWhat Standards Apply to Definition of Knowledge?
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Actual after Investigation Actual Without Investigation
Constructive Knowledge List of Identified Persons/Positions
53.30%
42.20%
5.60%
91.10%
KAYE SCHOLER LLP
Buyer’sRepresentations and Warranties
60
Financing Representation What Percentage of Deals Include a Financing Representation by Buyer?
Type of Financing Rep?
Does Not Include Rep14%
Includes Rep86%
Current Ability to Finance the Deal
10%
Description of How Deal will be Financed
90%
61
Buyer’s Solvency RepresentationExample
Based on information heretofore provided by the Company
to the Purchaser and assuming the accuracy of the Company's
representations and warranties under this Agreement,
immediately following the Closing, (a) the property of the
Company, at a fair valuation, exceeds the sum of its debts
(including contingent and unliquidated debts) and (b) the
Company shall be able to pay its debts as they mature.
62
Buyer’s Solvency RepresentationWhat Percentage of Deals include a Buyer’s Solvency Representation?
Does Not Include Rep81%
Includes Rep19%
KAYE SCHOLER LLP
Covenants
64
No-Shop/Exclusivity CovenantWhat Percentage of Deals include an Express “No Shop/Exclusivity Covenant”?
Does Not Include Covenant22%
Includes Covenant78%
65
Non-Compete and Non-Solicit CovenantsWhat Percentage of Deals have Non-Compete or Non-Solicit Covenants and, if Limited by Time, How Long are Average Limits?
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Non-Compete Provision Non-Solicit Employees Non-Solicit Customers
43.20%
48.40%
12.60%
Average Length:
34.9 Months
Average Length:
28.1 MonthsAverage Length:
38.3 Months
66
HSR Obligation to DivestWhat Percentage of Deals with an Express Obligation to Clear Hart-Scott-Rodino Include or Negate an Obligation to Divest Assets?
No Obligation to Divest
10%
Obligation to Divest12%
Silent78%
67
HSR Covenant Who Pays the HSR Fee?
Buyer33% Shared by
Buyer and Seller24%
Silent43%
KAYE SCHOLER LLP
Updating and “Sandbagging”
69
Covenant to Update Example
Between the date of this Agreement and the Closing Date,
each Seller will promptly notify Buyer in writing if such Seller
or any Acquired Company becomes aware of any fact or
condition that causes or constitutes a Breach of any of Sellers’
representations and warranties as of the date of this
Agreement. Should any such fact or condition require any
change in the Disclosure Letter, if the Disclosure Letter were
dated the date of the occurrence or discovery of any such
fact or condition, Sellers will promptly deliver to Buyer a
supplement to the Disclosure Letter specifying such change.
(Source: ABA Model Stock Purchase Agreement)
70
Buyer may not terminate and buyer has no right to indemnity3%
Buyer may not terminate, but update does not affect the Buyer's right to be indemnified
6%
Buyer must chose either to terminate the agreement or accept the update29%
Silent62%
Covenant to Update
What is the Effect of Updating?What Percentage of Deals Requires
Seller to Update its Schedules or
Advise of Breach of Representation?
Obligated to Notify38%
Permitted to Update or Supplement Schedules15%
Prohibited from Updating or Supplementing Schedules 1%
Silent46%
71
Sandbagging and Anti-SandbaggingWhat are Typical Provisions with Respect to “Sandbagging”?
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Anti-Sandbagging (No indemnification if Buyer had knowledge of breach)
Express Pro-Sandbagging (Buyer's knowledge of breach does NOT affect
indemnity)
Silent
11.60%
25.30%
60.00%
72
Kaye Scholer refers to Kaye Scholer LLP and its affiliates operating in various jurisdictions.
Chicago . Frankfurt . London . Los Angeles . New York . Shanghai . Washington D.C. . West Palm Beach
Kaye Scholer Private Equity Group
Laurie Abramowitz (Tax - NY)212.836.7038 labramowitz@kayescholer.com
Lauren Bernstein (Acquisition Finance - NY)212.836.7091lbernstein@kayescholer.com
Steven G. Canner (NY)212.836.8136scanner@kayescholer.com
Russ Cashdan (LA)310.788.1168rcashdan@kayescholer.com
Emanuel S. Cherney (NY)212.836.7061echerney@kayescholer.com
Barry Dastin (LA) 310.788.1070bdastin@kayescholer.com
Simon Firth (Fund Formation - London)(44) 20.7105.0583sfirth@kayescholer.com
Lynn Toby Fisher (NY)212.836.8685lfisher@kayescholer.com
Stuart Fleet (London)(44) 20.7105.0576sfleet@kayescholer.com
Nancy E. Fuchs (NY)212.836.8565nfuchs@kayescholer.com
Edmond Gabbay (Acquisition Finance - NY)212.836.8876egabbay@kayescholer.com
Sheryl Gittlitz (Acquisition Finance - NY)212.836.8119sgittlitz@kayescholer.com
Adam H. Golden (NY)212.836.8673agolden@kayescholer.com
Joel I. Greenberg (NY)212.836.8201jigreenberg@kayescholer.com
Rory A. Greiss (NY)212.836.8261rgreiss@kayescholer.com
Mark Kingsley (NY)212.836.7092mkingsley@kayescholer.com
Stephen C. Koval (NY)212.836.8019skoval@kayescholer.com
Jeffrey L. London (Tax - Chicago)312.583.2339jllondon@kayescholer.com
Russell N. Pallesen (Chicago)312.583.2345
rpallesen@kayescholer.com
Marci Settle (NY)212.836.8399msettle@kayescholer.com
Timothy Spangler (Fund Formation - NY/London)212.836.8502 (44) 20.7105.0582tspangler@kayescholer.com
Derek M. Stoldt (NY)212.836.8032dstoldt@kayescholer.com
Louis Tuchman (Tax - NY)212.836.8267ltuchman@kayescholer.com
William E. Wallace, Jr. (NY)212.836.8556wwallace@kayescholer.com
Arthur F. Woodard (Tax - NY)212.836.8005awoodard@kayescholer.com
Thomas Yadlon (NY)212.836.7166tyadlon@kayescholer.com