busted m&a deals headed for litigation - Jackson Walker LLP

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BUSTED M&A DEALS HEADED FOR LITIGATION: WHAT HAPPENS WHEN BAD THINGS SURFACE BETWEEN SIGNING AND CLOSING By Moderator: Byron F. Egan, Dallas, TX * R. Franklin Balotti, Wilmington, DE Nathaniel L. Doliner, Tampa, FL George W. Patrick, Voorhees, NJ H. Lawrence Tafe, III, Boston, MA I. INTRODUCTION There is often a fair length of time that elapses between the signing of an acquisition agreement and the closing of the transaction. A number of things can happen during that period that will cause a buyer to have second thoughts about the transaction. For example, it might discover material misstatements or omissions in the seller’s representations and warranties, or events might occur, such as the filing of litigation or an assessment of taxes, that could result in a material liability or, at the very least, additional costs that had not been anticipated. There may also be developments that could seriously affect the target’s future prospects, such as a significant downturn in its revenues or earnings or the adoption of governmental regulations that could adversely impact the entire industry in which the target operates. The buyer initially will need to assess the potential impact of any such misstatement, omission or event. If a potential liability can be quantified, the analysis will be somewhat easier. However, the impact in many situations will not be susceptible to quantification, making it difficult to determine materiality and to assess the extent of the buyer’s exposure. Whatever the source of the matter, the buyer may want to terminate the acquisition agreement or, alternatively, to close the transaction and seek recovery from the seller. If it wants to terminate the agreement, how strong is its legal position and how great is the risk that the seller will dispute termination and commence a proceeding to seek damages or compel the buyer to proceed with the acquisition If the buyer wants to close, could it be held responsible for the liability and, if so, what is the likelihood of recovering any resulting damage or loss against the seller Will closing the transaction with knowledge of the misstatement, omission or event have any bearing on the likelihood of recovering The dilemma facing a buyer under these circumstances seems to be occurring more often in recent years. This was highlighted by the Delaware Chancery Court decisions in IBP, Inc. v. Tyson Foods, Inc., 789 A.2d 14 (Del. Ch. 2001), in which the Court ruled that the buyer did not have a * Mr. Doliner is the immediate past-chair of the ABA Business Law Section’s Negotiated Acquisitions Committee. Messrs. Egan and Tafe served as Co-Chairs of the Asset Acquisition Agreement Task Force of the ABA Business Law Section’s Negotiated Acquisitions Committee which prepared the ABA Model Asset Purchase Agreement with Commentary. Messrs. Balotti and Patrick are members of the Negotiated Acquisitions Committee. 4032470v.1 - 1 -
valid basis to terminate the merger agreement and ordered that the merger be consummated (see Appendix C), and Frontier Oil Corp. v. Holly Corp., CA No. 20502 2005, WL 1039027, (Del. Ch. Apr. 29, 2005), in which the Court ruled a target had not repudiated a merger agreement by seeking to restructure the transaction due to legal proceedings commenced against the buyer after the merger agreement was signed (see Appendix D). While these cases are each somewhat unique and involved mergers of publicly-held corporations, the same considerations will generally apply to acquisitions of closely-held businesses. Nixon v. Blackwell, 626 A.2d 1366, 1380-81 (Del. 1993) (en banc) (refusing to create special fiduciary duty rules applicable in closely held corporations); see Merner v. Merner, 2005 WL 658957 (9 th Cir. (March 18, 2005)) (California would follow approach of Delaware in declining to make special fiduciary duty rules for closely held corporations); but see Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 515 & n. 17 (Mass. 1975) (comparing a close corporation to a partnership and holding that “stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another”). There is little case law dealing with these issues in the context of an acquisition because, more often than not, the parties will attempt to reach a settlement rather than resorting to legal proceedings. The issues facing the parties in a soured acquisition will depend somewhat on the structure of the transaction and the wording of the acquisition agreement. Regardless of the wording of the agreement, however, there are some situations in which a buyer can become responsible for a seller’s liabilities under successor liability doctrines. The analysis of these issues is somewhat more complicated in the acquisition of assets, whether it be the acquisition of a division or the purchase of all the assets of a seller. The authors have therefore selected as the basis for the analysis a prepublication draft of the Model Asset Purchase Agreement, published by the American Bar Association in 2001. The materials include: (A) An overview of the three basic forms of business acquisitions: (i) (ii) (iii) Statutory business combinations (e.g., mergers, consolidations and share exchanges); Stock purchases; and Asset purchases. (B) Introductory matters concerning the reasons for structuring the transaction as an asset purchase. (C) A discussion of the various successor liability doctrines and some suggested means of minimizing the risk. (D) An initial draft of certain key provisions of an Asset Purchase Agreement which focuses on the definition and solution of the basic issues in any asset purchase: (1) what assets are being acquired and what liabilities are being assumed, (2) what assets and liabilities are being left behind, (3) what are the conditions of the obligations of the parties to consummate the transaction and (4) what are the indemnification obligations of the parties. While these matters are always deal specific, some generalizations can be made and common problems identified. 4032470v.1 - 2 -
Page 1 and 2: BUSTED M&A DEALS HEADED FOR LITIGAT
Page 3: VII. SELECTED ASSET PURCHASE AGREEM
Page 7 and 8: 1986, as amended (the “Code”)).
Page 9 and 10: A purchase of assets also is cumber
Page 11 and 12: • Liabilities can be assumed by i
Page 13 and 14: of stock would avoid this “double
Page 15 and 16: There are a number of business reas
Page 17 and 18: The Third Circuit’s reasoning sug
Page 19 and 20: that every buyer would be liable fo
Page 21 and 22: (b) Environmental On the environmen
Page 23 and 24: and actual conflicts of interest th
Page 25 and 26: develop that a waiting period would
Page 27 and 28: 12. CONFIDENTIALITY................
Page 29 and 30: Agreement The parties, intending to
Page 31 and 32: “Breach” -- any breach of, or a
Page 33 and 34: use, voting (in the case of any sec
Page 35 and 36: “Ground Lease” -- any long-term
Page 37 and 38: “Order” -- any order, injunctio
Page 39 and 40: “Part” -- a part or section of
Page 41 and 42: “Seller Contact” -- as defined
Page 43 and 44: COMMENT Clauses (v), (vii), (viii)
Page 45 and 46: parties should always pay close att
Page 47 and 48: therewith (the “Business”), inc
Page 49 and 50: carefully review the breadth of thi
Page 51 and 52: Course of Business prior to the Eff
Page 53 and 54: uyer to negotiate the indemnificati
Page 55 and 56:
2.5 ALLOCATION The Purchase Price s
Page 57 and 58:
satisfaction of some conditions may
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(iii) the Escrow Agreement, execute
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Once a certified check has been cer
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espect to the Real Property and Tan
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work papers and other documents and
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expressly provide for arbitration i
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Closing, the parties shall use Best
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Alternatively, the Buyer can elect
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environmental representations that
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owned or used by it, or the nature
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(c) Except as set forth in Part 3.2
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in the usual and regular course of
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The term “Contemplated Transactio
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Seller) a “walk right” if they
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the evaluation of nearly all potent
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motion to dismiss, the Court wrote
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and financing agreements, as well a
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v. General Housewares Corp., 482 N.
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Seller is an S corporation as defin
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(2) The Seller is an S corporation
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ecause (i) the material adverse cha
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While noting that IBP v. Tyson appl
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exception carves out the exclusions
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In summary, the debate over the con
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2. pending violations (clause (i));
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Except as set forth in Part 3.19, s
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Seller is the owner or licensee of
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(iii) No Net Name of Seller has bee
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seventeen years from the date of gr
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year of registration of a mark to s
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3. For anonymous works, pseudonymou
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anticipated uses of the cash, will
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Fraudulent Transfer Without Intent
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of the consequences of disclosed it
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In many acquisitions, the buyer’s
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(b) except as otherwise directed by
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ecome directly involved in making b
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the waiting period, Section 5.4 giv
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provision because obtaining the Con
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assure that the new consideration f
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the Closing, the Buyer may decline
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Pursuant to this Section, all of th
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that these historical financial sta
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means of a “bring down” represe
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(d) A statement from the holder of
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Section 7.5 relates only to litigat
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A seller may take the position that
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Buyer shall have obtained on terms
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and (d) have no materiality test. T
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the part of the seller. In lieu of
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enefits and salary and wage structu
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to the sale of any property to the
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prohibits the Buyer from making any
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for stock ownership in a public com
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investigation or assessment) conduc
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sue on the breach, under the common
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should be limited to situations in
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eaches of noncompetition agreements
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Thomas Drayage & Rigging Co., 442 P
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the Facilities, Assets, or the busi
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The issue of control of cleanup and
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effect that such a materiality qual
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Section 11.7 provides that claims g
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Rather than inviting counterproposa
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Person of its election to assume th
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Section 11.9(d) permits the Buyer t
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in order for an indemnity to be enf
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The Model Agreement follows typical
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(c) From and after the Closing, the
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Agreement and all materials of any
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Party’s Confidential Information
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The courts have developed two doctr
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13. GENERAL PROVISIONS 13.4 JURISDI
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Noting that Tyson had not argued th
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parties’ negotiations, if any, re
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may not be available in arbitration
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Rules and the provisions of this Se
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As with all ADR provisions, the sub
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arguing that any limitations on dam
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disclaimer at issue here is general
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Disclosure Letter with respect to a
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an orderly manner and then distribu
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arred the shareholders’ derivativ
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there is a fundamental conflict wit
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e used in lieu of the original Agre
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pen. A digital signature is not a r
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the injured party, and who can best
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Over time, some courts have used le
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focus of the inquiry is the continu
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The product line exception is not w
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Court created the continuity of ent
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3. Labor, Employment and Benefits C
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5. Contract Cases In certain instan
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4. Choice of Law In transactions wh
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Appendix B ACQUISITION OF A DIVISIO
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As a general rule, buyer will requi
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would continue to manufacture and s
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will require carefully drawn confid
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EXAMPLE 1 SAMPLE DESCRIPTION OF ASS
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INTRODUCTION TO TRANSITIONAL SERVIC
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1.3 “Fully Allocated Cost” shal
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5. Force Majeure 5.1 Seller shall n
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12. Entire Agreement 12.1 This Agre
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SCHEDULE 1.2 FIXED PRICE SERVICES P
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SCHEDULE 1.4 HR SERVICES HR Service
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Appendix C In re IBP, Inc. Sharehol
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If our belief is proven wrong and t
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Section 5.01. Corporate Existence a
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the information incrporated (sic) b
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(b) liabilities incurred in the ord
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operations that is consequential to
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Appendix D Frontier Oil Corp. v. Ho
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ureau, agency or instrumentality, o
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(a) the Mergers shall not have been
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(i) by Holly or Frontier, after the
Page 287 and 288:
Frontier Commences Litigation The f
Page 289 and 290:
seek the break-up fee was condition
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