What s Market

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%


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%


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.


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.


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?


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?


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?


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.


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 [email protected]

Lauren Bernstein (Acquisition Finance - NY)[email protected]

Steven G. Canner (NY)[email protected]

Russ Cashdan (LA)[email protected]

Emanuel S. Cherney (NY)[email protected]

Barry Dastin (LA) [email protected]

Simon Firth (Fund Formation - London)(44) [email protected]

Lynn Toby Fisher (NY)[email protected]

Stuart Fleet (London)(44) [email protected]

Nancy E. Fuchs (NY)[email protected]

Edmond Gabbay (Acquisition Finance - NY)[email protected]

Sheryl Gittlitz (Acquisition Finance - NY)[email protected]

Adam H. Golden (NY)[email protected]

Joel I. Greenberg (NY)[email protected]

Rory A. Greiss (NY)[email protected]

Mark Kingsley (NY)[email protected]

Stephen C. Koval (NY)[email protected]

Jeffrey L. London (Tax - Chicago)[email protected]

Russell N. Pallesen (Chicago)312.583.2345

[email protected]

Marci Settle (NY)[email protected]

Timothy Spangler (Fund Formation - NY/London)212.836.8502 (44) [email protected]

Derek M. Stoldt (NY)[email protected]

Louis Tuchman (Tax - NY)[email protected]

William E. Wallace, Jr. (NY)[email protected]

Arthur F. Woodard (Tax - NY)[email protected]

Thomas Yadlon (NY)[email protected]

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