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

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II. ALTERNATIVE STRUCTURES FOR SALES OF BUSINESSES The actual form of the sale of a business can involve many variations. Nonetheless, there are many common threads involved for the draftsman. The principal segments of a typical agreement for the sale of a business include: (1) Introductory material (i.e., opening paragraph and recitals); (2) The price and mechanics of the business combination; (3) Representations and warranties of the buyer and seller; (4) Covenants of the buyer and seller; (5) Conditions to closing; (6) Indemnification; (7) Termination procedures and remedies; and (8) Miscellaneous (boilerplate) clauses. There are many basic legal and business considerations for the draftsman involved in the preparation of agreements for the sale of a business. These include federal income taxes; state sales, use and transfer taxes; federal and state environmental laws; federal and state securities laws; the accounting treatment; state takeover laws; problems involving minority shareholders; the purchaser’s liability for the seller’s debts and contingent liabilities; insolvency and creditors’ rights laws; problems in transferring assets (mechanical and otherwise); state corporation laws; stock exchange rules; pension, profit-sharing and other employee benefit plans; antitrust laws; foreign laws; employment, consulting and non-compete agreements; union contacts and other labor considerations; the purchaser’s security for breach of representations and warranties; insurance; and a myriad of other considerations. There are three basic forms of business acquisitions: (ii) (iii) (iv) Statutory business combinations (e.g., mergers, consolidations and share exchanges); Purchases of shares; and Purchases of assets. A. Mergers and Consolidations Mergers and consolidations involve a vote of shareholders, resulting in the merging or disappearance of one corporate entity into or with another corporate entity. Mergers and consolidations can be structured to be taxable or non-taxable for federal income tax purposes. Simply stated, if stock is the consideration for the acquisition of the non-surviving corporation, the merger can qualify as an “A” reorganization (Section 368(a)(1)(A) of the Internal Revenue Code of 4032470v.1 - 3 -
1986, as amended (the “Code”)). Thus, a shareholder of the target corporation receives stock in the purchasing corporation wholly tax-free. However, a shareholder of the target company who receives only “boot” (i.e., consideration other than purchaser’s stock or other purchaser securities under certain circumstances) is normally taxed as if the shareholder had sold his stock in the target corporation in a taxable transaction. Generally stated, a shareholder who receives both stock and boot is not taxed on the stock received but is taxed on the boot. The boot is taxed either as a dividend or as a capital gain, but not in excess of the gain which would have been realized if the transaction were fully taxable. B. Purchases of Shares Purchases of shares of the target company can likewise be handled on a taxable or nontaxable basis. In a voluntary stock purchase, the acquiring corporation must generally negotiate with each selling shareholder individually. An exception to this is a mechanism known as the “share exchange” permitted by certain state business corporation statutes (see e.g. Texas Business Corporation Act Articles 5.02 and 5.06) under which the vote of holders of the requisite percentage (but less than all) of shares can bind all of the shareholders to exchange their shares pursuant to the plan of exchange approved by such vote. Generally speaking, if the purchasing corporation acquires the stock of the target corporation solely in exchange for the purchaser’s voting stock and, after the transaction the purchasing corporation owns stock in the target corporation possessing at least 80% of the target’s voting power and at least 80% of each class of the target corporation’s non-voting stock, the transaction can qualify as a tax-free “B” reorganization. See §368(a)(1)(B) of the Code. Note that one disadvantage of an acquisition of the target corporation’s stock is that the purchasing corporation does not obtain a “step-up” in the basis of the target corporation’s assets for tax purposes. If the stock acquisition qualifies as a “qualified stock purchase” under §338 of the Code (which generally requires a taxable acquisition by a corporation of at least 80% of the target corporation’s stock within a 12-month period), an election may be made to treat the stock acquisition as a taxable asset purchase for tax purposes. However, after the effective repeal of the General Utilities doctrine, discussed infra, §338 elections are seldom made unless the target is a member of a group of corporations filing a consolidated federal income tax return (or, since 1994, an S corporation) and the seller(s) agree to a §338(h)(10) election, which causes the seller to bear the tax on the deemed asset sale since the present value of the tax savings to the buyer from a stepped-up basis in target’s assets is less than the corporate-level tax on the deemed asset sale. C. Asset Purchases Generally speaking, asset purchases feature the advantage of specifying the assets to be acquired and the liabilities to be assumed. A disadvantage involved in asset purchases in recent years, however, has been the repeal, pursuant to the Tax Reform Act of 1986, of the so-called General Utilities doctrine. Prior to then, the Code generally exempted a “C” corporation from corporate-level taxation (other than recapture) on the sale of its assets to a third party in connection with a complete liquidation of the corporation and the distribution of the proceeds to its shareholders. After the effective repeal of the General Utilities doctrine, a “C” corporation generally recognizes full gain on a sale of assets even in connection with a complete liquidation. Thus, if a 4032470v.1 - 4 -
Page 1 and 2: BUSTED M&A DEALS HEADED FOR LITIGAT
Page 3 and 4: VII. SELECTED ASSET PURCHASE AGREEM
Page 5: valid basis to terminate the merger
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
Page 59 and 60:
(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
Page 265 and 266:
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
Page 271 and 272:
Section 5.01. Corporate Existence a
Page 273 and 274:
the information incrporated (sic) b
Page 275 and 276:
(b) liabilities incurred in the ord
Page 277 and 278:
operations that is consequential to
Page 279 and 280:
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
Page 285 and 286:
(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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