2013 European Private Target M&A Deal Points Study · M&A Market Trends Subcommittee, Mergers &...

M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 2013 European Private Target Study, slide 1

A Project of the Mergers & Acquisitions Market Trends Subcommittee, Mergers & Acquisitions Committee

of the American Bar Association’s Business Law Section

2013 European Private Target M&A Deal Points Study

Kramer Levin Naftalis & Frankel LLP is pleased to make available this study, chaired by one of our partners, presenting data on European M&A deals and comparisons with U.S. practice. Contact: Reid Feldman – Partner / Avocat à la Cour Telephone +33 1 44 09 46 03 / +1 212 715 3777


A Project of the Mergers & Acquisitions Market Trends Subcommittee

of the Mergers & Acquisitions Committee of the American Bar Association’s Business Law Section

Subcommittee Chair Hal J. Leibowitz, Wilmer Cutler Pickering Hale and Dorr LLP

Past Subcommittee Chairs

Wilson Chu, K&L Gates LLP (Founding Subcommittee Chair) Larry Glasgow, Gardere Wynne Sewell, LLP (Founding Subcommittee Chair)

Keith A. Flaum, Weil Gotshal & Manges LLP James R. Griffin, Weil Gotshal & Manges LLP

Jessica C. Pearlman, K&L Gates LLP

Chair, Mergers & Acquisitions Committee Mark A. Morton, Potter Anderson and Corroon LLP


(For Transactions in 2009, 2010 or 2011)



DISCLAIMERS The findings presented in this Study do not necessarily reflect the personal views of the Working Group members or the views of their respective firms. In addition, the acquisition agreement provisions that form the basis of this Study are drafted in many different ways and do not always fit precisely into particular “data point” categories. Therefore, Working Group members have had to make various judgment calls regarding, for example, how to categorize the nature or effect of the provisions. As a result, the conclusions presented in this Study may be subject to important qualifications that are not expressly articulated in this Study.

CHAIR

Reid Feldman Kramer Levin Naftalis & Frankel LLP

Paris, France VICE-CHAIRS

Stephan R. Goethel Taylor Wessing

Hamburg, Germany

Jan-Willem van Rooij Loyens & Loeff

Rotterdam, Netherlands

Andrew Saul Osborne Clarke

London, England

Richard Silberstein Gómez-Acebo & Pombo

Barcelona, Spain

CONTRIBUTORS Georg-Philipp Cotta

Beiten Burkhardt Munich, Germany

Christiaan de Brauw NautaDutilh

Amsterdam, The Netherlands

Olaf Ehrenskjöld Gorrissen Federspiel Kierkegaard

Copenhagen, Denmark

Sabine Klett Noerr

Munich, Germany

Christian Herbst Schoenherr

Vienna, Austria

Alejandro Payá Cuatrecasas

Barcelona, Spain

Lars Teigelack White & Case

Frankfurt, Germany

Diane Frankle Kaye Scholer

Palo Alto, California

Hubert Segain Herbert Smith Paris, France

Ian Tully Curtis, Mallet-Prevost, Colt & Mosle

Milan, Italy

Ulf Hackenberg DSPPR & Partner

Düsseldorf, Germany

Kimmo Mettälä Krogerus

Helsinki, Finland

Duco de Boer Katrien Vorlat Stibbe

Amsterdam, NL Brussels, BE

Finn Lernø Plesner

Copenhagen, Denmark

Emanuele Trucco Shearman & Sterling

Milan, Italy

Yan Pecoraro Portolano Cavallo

Milan, Italy


This Study analyzes share purchase agreements for acquisitions of privately held targets in Europe signed or closed in 2009, 2010 or 2011* meeting the following criteria: (a) transaction value** was at least €20 million; (b) the Target was a company whose shares are not publicly traded; (c) the transaction was a pure share deal (i.e. not for purchase of assets or acquisition of a combination of assets and shares); and (d) the Target or a substantial part of its assets or operations were in Europe.

As acquisition agreements are not generally publicly available in Europe, the Study sample consists of information on acquisition agreements provided by Working Group members’ firms in Austria, Belgium, Denmark, France, Finland, Germany, Italy, Netherlands, Spain, the UK and the USA.

Data were collected by means of questionnaire responses (with no communication of confidential data from the deals studied). Validity and consistency of data were verified by review of sanitized agreements or excerpts thereof. On some slides percentages total 101% due to rounding.

Comparisons are made in this Study to the 2010 European Private Target Deal Points Study (for transactions completed in 2008) and the 2011 US Deal Points Study (for transactions completed in 2010).***

Transaction Value Range # of Deals Closing

€20M – €1,2B

101 Deferred Simultaneous Sign-and-Close

79% 21%

* Five deals were signed in 2011 and closed in the first quarter of 2012. ** Transaction value includes capped or calculated earn-outs and assumption of Seller’s debt but not uncapped earn-outs to the extent

not yet calculated or Target’s debt. ***These studies are available at http://apps.americanbar.org/dch/committee.cfm?com=CL560003

2013 European Private Target Study Sample Overview


Contents I. Study Sample …………………………………………………………………………………………………………………………..……. Slide 6

A. Analysis of study sample by transaction value, industry, nature of parties, use of controlled auctions, Target’s country of principal operations and applicable law ………………………………………….……………………… Slides 7-14

B. Comparative Data re Sample……………………………………………………………………………………………………. Slide 15 II. Financial Provisions …………………………………………..………………………………………………………………………....... Slide 16

A. Payment Terms ………………………………………………………………………………………………………………….. Slide 17 B. Post-Closing Purchase Price Adjustments ……………………………………………………………………………………. Slide 18

III. Pervasive Qualifiers …………………………………………………………………………………....………………………………….... Slide 19 A. Material Adverse Effect ……………………………………………………………………………………………………….… Slide 20 B. Knowledge ………………………………………………………………………………………………………………………… Slide 29 C. Comparative Data re Pervasive Qualifiers …………………………………………………………………………………...... Slide 31

IV. Representations and Warranties ……………………………………………………...…………….……………………………………. Slide 32 A. Representations Concerning Financial Statements …………………………………….………………………………………. Slide 33 B. “No Undisclosed Liabilities” Representation …………………………………………………………………………………...... Slide 35 C. “Full Disclosure” Representation ………………………………………………………………………………………………. Slide 37 D. “Compliance with law” Representation ……………………………………………………………………….………………….. Slide 39 E. Representations Implied by Law ………………………………………………………………………………………………..… Slide 41 F. Comparative Data re Representations ………………………………………………………………………………………….. Slide 42

V. Conditions to Closing …………………………………………………………………………………...…………………………………. Slide 43 A. Accuracy of Representations ……………………………………………………………………………………………………… Slide 44 B. Material Adverse Change Condition …………………………………………………………………………………………….. Slide 49 C. No Legal Proceedings Challenging the Transaction ………………………………………………………………………….... Slide 51 D. Legal Opinions (Non-Tax) of Seller’s Counsel …………………………………………………………………………………. Slide 53 E. Retention of Employees……………………………………………………………………………………………………………. Slide 54 F. Comparative Data re Closing Conditions ……………………………………………………………………………................. Slide 55

VI. Indemnification ………………………………………………………………………………………….…………………………………... Slide 56 A. “Sandbagging” ………………………………………………………………………………………………………..……………. Slide 57 B. “No Other Representations and Warranties” ……………………………………………………………………………………. Slide 59 C. Survival/Time to Assert Claims ……………………………………………………………………………………..…………… Slide 64 D. Definition of Damages …………………………………………………………………………………………………................. Slide 67 J. Baskets …………………………………………………………………………………………………………………………….... Slide 69 K. Caps …………………………………………………………………………………………………………………………………. Slide 78 L. Indemnification as Exclusive Remedy……………………………………………………………………………………………. Slide 81 M. Right of Seller to Remedy a Breach………………………………………………………………………………………………. Slide 83 N. Control of Defense Against Third-Party Claims………………………………………………………………………………….. Slide 84 O. Stand-Alone Indemnities …………………………………………………………………………………………………………... Slide 86 P. Security for Payment of Seller’s Indemnification Obligations ……………………………………………………………….…. Slide 87 Q. Comparative Data re Indemnification ……………………………………………………………………………………………... Slide 91

VII. Dispute Resolution …………………………………………………………………………………………………………………………..... Slide 92 A. Dispute Resolution Mechanism …………………………………………………………………………………………………… Slide 93 B. Comparative Data re Dispute Resolution ………………………………………………………………………………………… Slide 94


Study Sample


€20M up to €40M34%

€40M up to €80M22%

€80M up to €160M19% €160M up to €240M

10%

€240M up to €320M1%

€320M up to €400M6%

€400M up to €560M1%

€560M up to €720M4%

€720M up to €900M2%

≥ €900M1%

* Mean transaction value was €143 million and median transaction value was €62 million.

2013 European Private Target Study Sample (by transaction value)*

Study Sample


Study Sample

Industrial Goods and Services

Technology

Food & Beverage

Media

Retail

Telecomunications

Financial Services

Construction & Materials

Health Care

Aerospace & Defense

Personal & Household Goods

Oil & Gas

Other**

20%

17%

13%

12%

8%

8%

7%

5%

5%

3%

3%

3%

18%* 12% of Targets had activities in more than one industry. ** “Other” includes: travel, real estate, facility management, IP rights management, leisure & recreation, cargo, other energy, auto rental,

internet platform and airport/aviation services.

2013 European Private Target Study Sample (by industry)*


Corporate

Fin. & Corp.

Financial

Fin. & Entr.

Entrepreneurial

2%

0%

1%

1%

16%

0000

1%

3%

1%

13%

1%

7%

0%0%0%0%

1%

17%

2%

13%

1%

20%

0%0%0%0%

1%

Study Sample

2013 European Private Target Study Sample (by nature of parties)

46%

3%

27%

3%

22% Prin

cipa

l Sel

lers

Buyers

(these data also presented in table form on next slide)

Entrepreneurial Financial & Entrepreneurial

Financial Financial & Corporate

Corporate Corporate & Entrepreneurial

Financial & Corporate

Financial & Entrepreneurial


Study Sample

Buyers

Entrepreneurial Financial &

Entrepreneurial Financial Financial &

Corporate Corporate Corporate &

Entrepreneurial Total

Pri

ncip

al S

elle

rs Entrepreneurial 16% 1% 7% 1% 20% 1% 46%

Financial & Entrepreneurial 1% 0% 1% 0% 1% 0% 3%

Financial 1% 0% 13% 0% 13% 0% 27%

Financial & Corporate 0% 0% 1% 0% 2% 0% 3%

Corporate 2% 0% 3% 0% 17% 0% 22%

Total 18% 1% 22% 1% 36% 1% 100%

2013 European Private Target Study Sample (by nature of parties)


Resulted From Controlled

Auction28%

No Controlled Auction

72%

Study Sample

2013 European Private Target Study Sample (use of controlled auctions)


Austria3%

Belgium5%

Brazil*2%

Bulgaria1%

Denmark6%

France5%

Finland4%

Germany21% Italy

6%

Netherlands20%

Romania1%

Spain8%

Switzerland1%UK

14%USA**

1%Worldwide***

3%

Study Sample

2013 European Private Target Study Sample (by country of principal operations of Target)

* Of the two Targets with principal operations in Brazil, one had a substantial presence (its headquarters) in Spain and the other had substantial operations in France, Germany and Spain (among other countries).

** The one Target with principal operations in the USA also had substantial operations in Spain. *** The Targets classified as “Worldwide” all had substantial operations in various countries in Europe and elsewhere.


Study Sample

Austria3%

Belgium5% Delaware

2% Denmark6%

England18%

France6%

Finland4%

Germany*23%

Italy5%

Netherlands15%

New York2%

Spain10%

Switzerland1%

* Includes one deal with German and Bulgarian law applicable and one with German and Romanian law applicable.

2013 European Private Target Study Sample (applicable law)


Study Sample

* Examples of “Other”: shareholders of Seller, parent company of acquisition company. The 8 deals where the applicable law was not the law of either the Target, the Buyer or the Seller were subject to the law of England (5 deals), NY (2 deals) or Delaware (1 deal).

2013 European Private Target Study Sample (applicable law)


Private Target M&A Studies Comparative Data re Sample

Study Sample Overview

2011 US Study 2013 European Study

Years covered Deals closed in 2010 Deals signed and/or closed in 2009-2011

Sample 100 agreements for the acquisition of private targets by public companies 83% share deals, 17% asset deals 70% had a deferred closing

101 agreements for the acquisition of private targets by public or private companies 100% share deals 79% had a deferred closing

Top three principal industries in sample

Technology 29% Health Care 16% Industrial Goods & Services 10%

Industrial goods & services 20% Technology 17% Food & Beverage 13%

Transaction value $25M to $50M 28% €20M up to €40M 35%

$51M to $100M 25% €40M up to €80M 22%

$101M to $300M 16% €80M up to €240M 29%

$301M to $500M 7% €240M up to €400M 7%

>$500M none €400M up to €560M 1% €560M up to €720M 4% €720M up to €900M 2% > €900M 1%


Financial Provisions


Full Payment at Closing (with or without post-closing adjustments)

52%

Earnout*13%

Both deferred paymnet and separate earn-out

3%

Deferred Payment (Not Earnout)

32%

(73% in 2010 Eur. Study)




Payment Terms


* Most common earn-out metrics were earnings/EBITDA/profit.


* 68% of the post-closing purchase price adjustments were based on more than one metric. ** Includes EBITDA or other measure of earnings. *** Not separately categorized in 2010 Study. **** Examples of “other": capex, employee liabilities and costs, inventory, material permits, off balance sheet liabilities, tax matters,

licenses, lease agreements, gross revenue and inventory.


(Subset: includes adjustment)

Post-Closing Purchase Price Adjustments

Adjustment Metrics*



Working Capital

Earnings**

Assets or NAV

Debt***

Cash***

Other****

60%

12%

12%

68%

42%

36%

(43%)

(21%)

(29%)

(44%)

Deals in 2013 Study

Deals in 2010 Study


Pervasive Qualifiers


“Material Adverse Effect”*

“Material Adverse Effect” means any result, occurrence, fact, change,

event or effect that has a material adverse effect on the business, assets, liabilities, capitalization, condition (financial or otherwise), results of operations [or prospects] of Target.


* Data regarding Material Adverse Effect (“MAE”) clauses include clauses in some agreements which refer to a Material Adverse Change (“MAC”).


Stand-Alone MAE

Only54%

Back Door MAE Only

23%

Both Stand-

Alone and Back Door

MAE 23%

Material Adverse Effect - Clauses


MAE Clause

Included39%

MAE Clause Not Included

61%

(Subset: MAE Clause Included)



Definition of Material Adverse Effect

MAE Defined90 %

MAE Not Defined10 %

"Prospects" Included

66 %

"Prospects" Not Included

34 %

(Subset: MAE Defined)


(38% in 2010 Eur. Study) (47% in 2010 Eur. Study)


Definition of Material Adverse Effect - Carve Outs

“Material Adverse Effect” means …, except to the extent resulting from

(A) economic conditions (e.g., stock market crash), (B) conditions generally affecting Target’s or Buyer’s industry, (C) announcement or pendency of deal, (D) taking of any action contemplated or required by the acquisition agreement, (E) downturn in financial markets, (F) change in law, (G) change in accounting principles or (H) war or terrorism.



Definition Includes

Carve Outs 56 %

No Carve Outs

Included44 %


(subset: includes carve outs)

0% 10% 20% 30% 40% 50% 60% 70%

War or Terrorism

Industry Conditions

Financial Market Downturn

Economic Condtions

Change in Law

Change in Accounting Principles

Announcement or Pendency of Deal

Action Contemplated or Required by SPA

57%

29%

29%

48%

57%

28%

33%

62%


Definition of Material Adverse Effect - Carve Outs

(Subset: deals with MAE definition)

Action Contemplated or Required by the Agreement

Announcement or Pendency of the Deal Change in Accounting Principles

Change in Law Economic Conditions

Financial Market Downturn Industry Conditions

War or Terrorism


Definition of Material Adverse Effect – Carve Out(s) Qualified by Disproportionate

Effect

“Material Adverse Effect” means …, except to the extent resulting from (A) changes in general economic conditions, (B) changes affecting generally the industries in which the Target operates . . ., provided that such event, change or action does not affect the Target in a substantially disproportionate manner.



Definition of Material Adverse Effect – Carve Out(s) Qualified by Disproportionate

Effect

No Carve Out Qualified by

Disproportionate Effect62%

At Least One Carve Out

Qualified by Disproportionate

Effect 38%




Definition of Material Adverse Effect – Application to Individual Subsidiaries

“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that is or could reasonably be expected to have a materially adverse effect on (i) the business, assets, liabilities, capitalization, condition (financial or other), or results of operations of Target or any of its Subsidiaries, or (ii) Seller’s ability to consummate the transactions contemplated hereby.



Definition of Material Adverse Effect – Application to Individual Subsidiaries

MAE Applies to Target and

Subsidiaries Taken as a

Whole49%

MAE Applies to Target and

Subsidiaries Taken as a

Whole and on an Individual

Basis5%

MAE Applies to Target or

Subsidiaries on an Individual

Basis26%

Silent20%




Knowledge Actual Knowledge: “Knowledge” means the actual knowledge of the directors and officers of Target. Constructive Knowledge: - Role-Based Deemed Knowledge “Knowledge” means the actual knowledge of the directors and officers of

Target and the knowledge that each such person in his/her role as director or officer should have.

- Express Investigation Requirement “Knowledge” means the actual knowledge of the directors and officers of

Target and the knowledge that each such person in his/her role as director or officer should have after due and careful inquiry.

Knowledge Group: “Knowledge” means the knowledge of the directors and officers of Target and /or [other specified individuals].



Express InvestigationRequirement -

Reasonable or Due…

Express InvestigationRequirement - Other

Role-Based DeemedKnowledge

Other

66%

12%

22%

12%

Knowledge – Standards


KnowledgeNot Defined

19% Actual Knowledge

24%

Constructive Knowledge

57%

(Subset: Knowledge defined, i.e. actual or constructive knowledge)

Specified Individuals

Senior Management(includes Officers)

Group Not Defined

Other

66%

22%

11%

15%

Express Investigation Requirement -

Reasonable or Due Inquiry

Express Investigation Requirement – Other

Role-Based Deemed Knowledge

Other

(Subset: Constructive Knowledge)


Comparative Data re Pervasive Qualifiers Study Sample Overview


MAE clause included 99% 39%

If clause included, MAE is defined 98 % 90 %

-- when defined, includes prospects 16 % 66 %

-- when defined, includes carve-outs 87 % 56 %

• of these, at least one carve-out qualified by disproportionate effects 80 % 38 %

MAE clause applies to:

-- Target + subsidiaries as a whole only 84 % 49 %

-- Target + subsidiaries on an individual basis only 3 % 26 %

-- Target and subsidiaries as a whole and on an individual basis 0 % 5 %

MAE clause is silent re application to Target or subsidiaries 13 % 20 %

Knowledge not defined 4 % 19 %

Knowlege is defined as actual knowledge 23 % 24 %

Knowlege is defined as constructive knowledge 73 % 57 %


Representations and Warranties


Financial Statements – “Fair Presentation” Representation

“Fairly presents” is GAAP-Qualified: The financial statements fairly present [to the Knowledge of Seller] the

financial position of the Target and its consolidated subsidiaries as of the respective dates thereof and the results of operations and cash flows of the Target and its consolidated subsidiaries for the periods covered thereby, all in accordance with GAAP.

“Fairly presents” is not GAAP-Qualified: The financial statements fairly present [to the Knowledge of Seller] the

financial position of the Target and its consolidated subsidiaries as of the respective dates thereof and the results of operations and cash flows of the Target and its consolidated subsidiaries for the periods covered thereby.



Financial Statements – “Fair Presentation” Representation

Rep not included

9%

Rep Included

91%

GAAP Qualified

41%

Not GAAP Qualified

49%

Specific Statutory Standard*

10%


(Subset: “Fair Presentation” Rep Included)

Knowledge Qualified

8%

Not Knowledge Qualified

92%

* Example of specific statutory standard: “true and fair view within the meaning of German Commercial Code (HGB)”.



Not GAAP-Qualified – “all liabilities” (Buyer favorable):

Target has no liability [to the Knowledge of Seller] except for liabilities

reflected or reserved against in the financial statements and current liabilities incurred in the ordinary course of business since [date].

GAAP-Qualified (Seller favorable):

Target has no liability [to the Knowledge of Seller] of the type required to be disclosed under GAAP, except for liabilities reflected in the [financial statements] and liabilities incurred in the ordinary course of business since [date].


“No Undisclosed Liabilities” Representation


“No Undisclosed Liabilities” Representation

Rep Not Included

45 %

Includes Rep

55 %

Knowledge Qualified

24%

Not Knowledge

Qualified76 %

"GAAP" Liabilities

(Seller Favorable)

20%

"All Liabilities"

(Buyer Favorable)

64%

Other*16%


(Subset: “No Undisclosed Liabilities” Rep Included)

* Example of “other”: “The Seller has not intentionally withheld any Information which (i) is important for a prospective purchaser to obtain a true and fair view of the business, assets and liabilities of the Target or (ii) would make any Due Diligence Information materially untrue or inaccurate.”





“10b-5” Formulation No representation or warranty or other statement made by the Seller

contains any untrue statement or omits to state a material fact necessary to make any of them, in the light of the circumstances in which it was made, not misleading.

Full disclosure Formulation

The Seller has disclosed all information relating to the Target which would be material to a buyer for value of the Shares and all such information is true, accurate and not misleading


“Full Disclosure” Representation


Rep included, 10b-5 type

12%

Rep Not Included

61%

Rep included, not 10b-5 type

27%


“Full Disclosure” Representation

Knowledge Qualified

41%

Not Knowledge

Qualified59%

(Subset: includes rep, whether or not 10b-5-type = 39%)






“Compliance with Law” Representation

[To the Sellers’ knowledge,] the business of Target [has been and] is being conducted in compliance with applicable law.



“Compliance with Law” Representation

Includes Compliance With Law

Rep79%

Rep Not included

21%

(Subset: includes rep)

45%

64%

16%

36%

Knowledge- Qualified

Covers present and past

Refers to a receipt of a notice of a notice of Investigation

Refers to a receipt of a notice of violation

Knowledge Qualified

Covers Present and Past Compliance

Includes Notice of Investigation

Includes Notice of Violation


Representations Implied By Law

Yes47%

No53%


Does the agreement specifically exclude representations that are implied by law?*

* Example of representations implied by law: warranty that the item sold is “fit for its intended purpose”.




2011 US Study 2013 European

Study

“Fair Presentation” rep included 77% 91%

- when included, rep was not GAAP qualified 76% 49%

“No Undisclosed Liabilities” rep included 96% 55%

- when included, rep was not GAAP qualified 61% 64%

“Full Disclosure” rep included 37% 39%

- when included, rep was not knowledge qualified 77% 59%

“Compliance with Law” rep included 99% 79%

Private Target M&A Studies Comparative Data re Representations



Conditions to Closing*

* Analysis includes only deals with deferred closings.


Single point in time: at closing Each of the Seller’s representations and warranties shall have been

accurate in all material respects as of the Closing Date as if made on the Closing Date.

Two points in time: at signing and at closing Each of the Seller’s representations and warranties is true and accurate

as at the date of this Agreement and shall be true and accurate as of the Closing Date as if made on the Closing Date.

Conditions to Closing

“Accuracy of Representations” – When Must They Be Accurate?



“Accuracy of Representations” – When Must They Be Accurate?

* In these cases Buyer’s obligation to close is not subject to Seller’s representations being accurate and the representations generally serve only as a basis for indemnification.





"When Made" (i.e. at Signing) Only

1% At Neither Signing Nor

Closing* 64%

"With Bring Down" (i.e. at Closing) Only

11%

"When Made" and "With Bring Down" (i.e. at Both

Signing and Closing) 24%


Accurate in all respects: Each of the representations and warranties is true and accurate in all respects. Accurate in all material respects: Each of the representations and warranties is true and accurate in all material

respects. Accurate in all material respects with "double materiality" scrape: Each of the representations and Warranties is true and accurate in all material

respects it being understood that, for the purposes of determining the accuracy of such representations, all "MAE" qualifications and other materiality qualifications in such representations shall be disregarded.


“Accuracy of Representations” – How Accurate Must They Be?


MAE qualification: Each of the representations and warranties is true and accurate, except for

inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have a Material Adverse Effect.

MAE qualification with "double materiality" scrape: Each of the representations and warranties is true and accurate, except for

inaccuracies of representations the circumstances giving rise to which do not constitute and could not reasonably be expected to result in a MAE, it being understood that for purposes of determining the accuracy of such representations, all "MAE" qualifications and other materiality qualifications contained in such representations shall be disregarded.


“Accuracy of Representations” – How Accurate Must They Be? (continued)


"In All Respects"

52%

"In All Material

Respects"24%

"In All Material

Respects" with "Double Materiality"

Scrape10%

MAE Qualification*

*4%

MAE Qualification with "Double Materiality"

Scrape**10%

“Accuracy of Representations” – How Accurate Must They Be?

(Subset: deals for which Buyer’s obligation to close is subject to reps being accurate at signing and/or closing*)



* Excludes one deal with a condition of accuracy referring to a loss of more than a specified sum, rather than “materiality”. ** In 2010 Eur. Study 4% of deals had a MAE qualification (with or without a double materiality scrape).



Stand-Alone: Since the date of this Agreement there has not been any Material

Adverse Change [in respect of the Target] Back-Door: “absence of changes” representation Since the Balance Sheet date, there has not been any Material

Adverse Change [in respect of the Target]

plus “bring down” formulation of “accuracy of representations” condition * In some agreements, instead of referring to the absence of a MAC the condition may refer to the absence of

an event causing a MAE.

Material Adverse Change Condition*



Material Adverse Change Condition

Includes MAC

Condition24%

MAC Condition

Not Included

76%

Stand-Alone MAC Condition

Only65%

Back-Door MAC

Condition Only15%

Both Stand-

Alone and Back-Door

MAC Condition

20%

(Subset: includes condition)





There will not be pending [or threatened] any action, suit, or similar legal

proceeding brought by an Governmental Entity [or third party] challenging or seeking to restrain or prohibit the consummation of the Transaction.

No Legal Proceedings Challenging the Transaction



No Legal Proceedings Challenging the Transaction

Includes Condition

12%

Condition Not

Included88%





Required*1%

Not Required

99%

Legal Opinions (Non-Tax) of Seller’s Counsel

* Represents one deal (parent of Buyer was a U.S. company; opinions related to selling shareholders in Bermuda and the Cayman Islands and to the Target’s French subsidiary).





Yes8%

No92%

Retention of Employees

Is there a stand-alone "Retention of Employee" condition to closing?



Private Target M&A Studies Comparative Data re Closing Conditions

Closing Conditions


Study

“Accuracy of Representations” Closing Condition included 100% 36%

Condition applies at signing (i.e. “when made”) and at closing (i.e. with “bring down”) 59% 24%

Condition applies only at signing or only at closing 41%, all only at closing

11% only at closing

1% only at signing

MAC Condition (“stand-alone” or “back door”) included 93% 24%

''No Legal Proceedings'' Condition 69% 12%

Legal Opinion (non-tax) Condition included 27% 1%


Indemnification


Indemnification

“Sandbagging” (i.e. ability of Buyer to seek remedy notwithstanding pre-existing knowledge of an inaccuracy or breach)

Pro-Sandbagging Provision: The right of Buyer to indemnification will not be affected by any knowledge acquired

or capable of being acquired by Buyer whether before or after the Closing Date with respect to the accuracy or inaccuracy of such representation or warranty.

Anti-Sandbagging (“Benefit-of-the-Bargain”) Provision: Seller shall not be liable for any Losses resulting from a breach of the

Representations and Warranties if Buyer had knowledge of such Seller Breach and/or the facts and/or circumstances giving rise to such Seller Breach before Closing.

Representation by Buyer Provision: Buyer is not aware of any breach or inaccuracy of any of the Seller’s Warranties or

any provision of this Agreement.

M&A Market Trends Subcommittee, Merers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 2013 European Private Target Study, slide 58

Silent*24%

Pro-Sandbagging

Clause Included

22%

Anti-Sandbagging Clause Included47%

Rep that Buyer has no

knowledge of breach or inaccuracy

8%

“Sandbagging”

Indemnification

* Includes agreements which refer to Buyer’s possible knowledge of breaches or inaccuracies but have no express statement on the impact on Buyer’s post-closing indemnification rights.

** In no deal were Buyer’s rights limited to walk rights.

(Subset: deals with pro-sandbagging

provisions)

Buyer’s rights** are limited to:

No limitation64%

Indemnification Rights Only

36%

Indemnification Rights Only

36%


“No Other Representations and Warranties” Indemnification

“No Other Representations and Warranties”

Except for the representations and warranties contained in [Section __, Target’s representations and warranties] (including the related portions of the Disclosure Schedules), none of Seller, the Target or any other Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller or the Target.

“Non Reliance”

Buyer agrees to purchase and acquire the shares based upon its own inspection, examination and determination with respect thereto as to all matters and without reliance upon any express or implied representations, warranties or covenants of any nature made by or on behalf of or imputed to Seller, except for the representations, warranties and covenants explicitly given by Seller under this Agreement.

“No Other Representations and Warranties” with “Non Reliance”

Buyer acknowledges that Target has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in Section 3, and that it is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties in Section __.


“No Other Representations and Warranties”/ Non-Reliance

Indemnification

Only Non-Reliance Clause Included

4%

Neither Clause Included

17%

Only "No Other Representations"Clause

Included20%

Both "No Other Representations" and Non-Reliance Clause

Included59%


Non-Reliance and “Sandbagging” - Correlation

Indemnification

Neither Provision Included

17%

Includes Pro-Sandbagging

Provision 15%

Provision Not Included

85%

(Subset: includes Non-Reliance provision) (Subset: includes Pro-Sandbagging provision)

"No Other Representations" or Express Non-

Reliance Provision Included

59%


41%

“No Other

Representations” or Express Non-


83%

Pro-Sandbagging

Provision Included

22%

Pro-Sandbagging


78%


Non-Reliance and “10b-5” Representation* - Correlation

Indemnification

"No Other Representations" or Express Non-


83%

Includes "10b-5" Representation

12%

RepresentationNot Included

88%

(Subset: includes Non-Reliance provision)


12%

(Subset: includes “10b-5” Representation)

* Includes both “10b-5”and “full disclosure” formulations.

Includes "No Other Reps" or Express

Non-Reliance Provision

83%


17%


“Sandbagging” and “10b-5” Representation* - Correlation

Indemnification


12%

Includes Pro-Sandbagging

Provision 33%


67%

(Subset: includes “10b-5” Representation)

Pro-Sandbagging

ProvisionIncluded

22%


18%

Representation Not Included

82%

(Subset: includes Pro-Sandbagging provision)

* Includes both “10b-5”and “full disclosure” formulations.


Survival/Time to Assert Claims Indemnification

Survival: All representations, warranties in this Agreement, the Disclosure Letter and any other

certificate or document delivered pursuant to this Agreement will survive the Closing. Time limitations: If the Closing occurs, Sellers will have no liability (for indemnification or otherwise) with

respect to any representation or warranty, unless on or before _______________ Buyer notifies Sellers of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer.


Survival/Time to Assert Claims (generally*)

Indemnification

* These periods apply to most representations; certain representations may be carved out from these periods and given other survival periods. ** Data for 2010 does not include one deal in which the survival period was tied to date of buyer’s awareness of the breach.

> 24 months

24 months

> 18 to < 24 months

18 months

> 12 months to < 18 months

12 months**

> 6 months to < 12 months

6 months

< 6 months

Express No Survival

Silent

(9%)

(25%)

(6%)

(23%)

(5%)

(15%)

(7%)

(0%)

(0%)

(1%)

(9%)

10%

21%

5%

34%

6%

13%

0%

1%

1%

1%

9%

Deals in 2013 Eur. Study

Deals in 2010 Eur. Study**


Other**

Intentional Breach of Warranties

Breach of Seller's / Target's Covenants

Fraud

Title to / Sufficiency of Assets (Rep)

Taxes (Rep)

Ownership of Shares (Rep)

No Conflicts (Rep)

Intellectual Property (Rep)

Environmental (Rep)

Employee Benefits / ERISA (Rep)

Due Organization (Rep)

Due Authority (Rep)

Capitalization (Rep)

Broker's / Finder's Fees (Rep)

32%

8%

12%

21%

12%

78%

71%

16%

13%

27%

23%

43%

43%

42%

5%

Survival/Time to Assert Claims – Carve Outs to Survival Limitations*

Indemnification

(Subset: deals with survival provisions*)

* Representations subject to carve outs typically have longer survival periods than those applicable to representations generally. ** Examples of other carve outs: employment matters and insolvency issues.


Damages Defined65%

Damages Not Defined

35%

Definition of Damages

Indemnification

* Example of other definitions of damages: “direct” loss.

(Subset: damages defined)



By Reference To Damages

Calculated under Applicable Law

23%

Amount Necessary To Put Target in Original

Position27%

Decrease in Value of Target's

Shares expressly excluded

3%

Decrease in Value of Target's

Shares expressly included

1%Limited to "Out of Pocket" Damages

5%

Other*41%


Expressly Included1%

Silent70%

Expressly Excluded29%

Types of Damages / Losses Covered Indemnification

Incidental Damages

Consequential Damages**


Silent51%


Punitive Damages

* 26% of the deals where damages are defined also included “Other Exclusions”, such as reputational damage or loss of goodwill. ** Reference to “Consequential Damages” includes “Loss of Profits”.

(Subset: deals where damages are defined*)


Silent27%



Indemnification

Baskets

Deductible:

Seller shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds EUR ________ (the “Deductible”) in which event Seller shall be responsible only for Losses exceeding the Deductible.

Threshold:

Seller shall not be required to indemnify Buyer for Losses until the aggregate amount of all Losses exceeds EUR ________ (the “Threshold”) in which event Seller shall be liable for the aggregate amount of all Losses and not merely for the excess.

Combination:

Seller shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds EUR ________ (the “Threshold”) in which event Seller shall be liable only for Losses in excess of EUR ______ (the “Deductible”).


Baskets

No Basket9%

Deductible13%

Threshold66%

Combination12%

Indemnification






Baskets as % of Transaction Value*

≤ 0.5%

> 0.5% to1%

> 1% to 2%

> 2%

(42%)

(31%)

(17%)

(11%)

40%

40%

12%

7%

Deals in 2013 Eur. StudyDeals in 2010 Eur. Study

Indemnification

(Subset: basket is a Threshold)

(Subset: basket is a Deductible)

* Data shown are for baskets applicable to total claims; separate thresholds or deductibles may also apply on a claim-by-claim basis or for breaches of specific representations or covenants.

≤ 0.5%

> 0.5% to 1%

> 1% to 2%

> 2%

(43%)

(21%)

(29)%

(7%)

33%

50%

17%

0%



Baskets – General Coverage and Carve Outs

Indemnification

(Subset: deals with baskets)

Other Indemnity Claims

Breaches of Seller / TargetCovenants

Breaches of Seller / Target Repsand Warranties

20%

32%

90%

* Examples of most common carve outs: taxes, fundamental title and authority representations and fraud.

Basket applies to:

Basket with NoCarve Outs

53%

Basket with Carve Outs

47%

Basket Carve Outs*


Baskets as % of Transaction Value (statistical summary)*

Basket Type Mean Median Minimum Maximum

Deductible 0.73% (0.97% in 2010 Eur. Study)

0.92% (0.86% in 2010 Eur. Study)

0.06% (0.10% in 2010 Eur. Study)

1.25% (3.75% in 2010 Eur. Study)

Threshold 0.99% (0.89% in 2010 Eur. Study)

0.67% (0.66% in 2010 Eur. Study)

0.06% (0.001% in 2010 Eur.

Study)

7.50% (5.00% in 2010 Eur. Study)

All Baskets (other than Combination)

0.94% (0.90% in 2010 Eur. Study)

0.78% (0.71% in 2010 Eur. Study)

– –

Indemnification

* Data for baskets applicable to total claims; carve outs or separate thresholds or deductibles may also apply on a claim-by-claim basis or for breaches of specific representations or covenants.


Eligible Claim Threshold

Indemnification

(Subset: deals with baskets) Sellers shall not be required to indemnify Buyer for any

individual item where the Loss relating to such claim (or series of claims arising from the same or substantially similar facts or circumstances) is less than EUR_______.


Eligible Claim Threshold

Indemnification


Includes Eligible Claim Threshold

88%

No Eligible Claim Threshold

12%


“Double Materiality” Scrape (materiality qualification in representations disregarded)

Indemnification

Materiality qualification in representations disregarded for all indemnification-related purposes

For purposes of this Article VIII (Indemnification), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect. Materiality qualification in representations disregarded for calculation of damages/losses only

For the sole purpose of determining Losses (and not for determining whether or not any breaches of representations or warranties have occurred), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.


“Double Materiality” Scrape (materiality qualification in reps disregarded)

Indemnification



Caps*

Breaches of Reps

Only41%

Other**22%

All Breaches

37%

Indemnification

Cap applies to:

(Subset: includes cap

= 96%) Silent or

Express No Cap4%

Cap Less Than

Purchase Price83%

Cap Equal to

Purchase Price13%

* Data for caps generally applicable to contractual indemnification obligations; carve-outs or separate caps may apply for specific kinds of claims (see “Cap Carve-Outs”, slide 80).

** E.g., specific indemnities and the obligation to continue the business in the ordinary course after signing.

(7% in 2010 Eur. Study) (10% in 2010 Eur. Study)



Cap Amounts as % of Transaction Value

Mean Median Minimum Maximum

34% 20% 2.9%* 100%

Indemnification

(Subset: deals with determinable cap)

** One deal with a transaction value of €190 million but aggregate total liability of all the Sellers limited to €5 million.


Cap Carve Outs

(Subset: cap with carve outs)

Indemnification

* Example of other carve outs: pending litigation, gross negligence.

Cap Carveouts

(Subset: deals with caps)

Cap with no Carve Outs

25%(22% in EUR 2010

Study)

Cap with Carve Outs75%

(78% in EUR 2010 Study)

30%

5%

11%

30%

3%

21%

45%

11%

2%

2%

4%

29%

29%

23%

2%

Other*

Breach of Seller's / Target's Covenants

Intentional Breach of Seller's / Target's Reps

Fraud

Title to / Sufficiency of Assets (Rep)

Taxes (Rep)

Ownership of Shares (Rep)

No Conflicts (Rep)

Intellectual Property (Rep)

Environmental (Rep)

Employee Benefits / ERISA (Rep)

Due Organization (Rep)

Due Authority (Rep)

Capitalization (Rep)

Broker's / Finder's Fees (Rep)


Indemnification as Exclusive Remedy*

Yes, for Breaches of ANY Provision

50%

Yes, for Breaches of Representations

ONLY**16%

No***34%

* Indemnification provisions in the agreement provide that they are the sole remedy, to the exclusion of statutory remedies. ** Includes one deal where indemnification is the exclusive remedy for breaches of Seller’s/Target’s representations and covenants. *** Includes express statements that indemnification is not the exclusive remedy and deals where this point is not expressly addressed.

Indemnification


IntentionalMisrepresentation

Fraud

Breach of Covenant

Other*

9%

26%

7%

7%

(11%)

(30%)

(8%)

(8%)



Indemnification as Exclusive Remedy – Carve Outs

* Examples of other carve outs: willful misconduct, gross negligence.

Indemnification

(Subset: deals with indemnification as exclusive remedy)


Right of Seller to Remedy a Breach

Indemnification

Does the agreement include a clause giving Seller an opportunity to remedy its breach before Buyer may institute action?

No60%


Yes40%



Control of Defense Against Third-Party Claims

Indemnification

Buyer controls defense: Buyer shall notify Seller of any claim against Target which could give rise to Seller’s

indemnification obligation. Buyer shall control the defense of such claim and shall inform Seller from time to time of the progress thereof.

Seller’s consultation rights: Buyer shall notify Seller of any claim against Target which could give rise to Seller’s

indemnification obligation and shall consult Seller on any material steps to be taken in defense of any such claim, including prior to any consent to entry of judgment or settlement thereof.

Seller’s defense rights: . . . provided, however, that Seller may at its expense conduct and control, through

counsel of its own choosing reasonably acceptable to Buyer, the settlement or defense of such claim, and provided further that Seller shall not consent to entry of judgment or settlement thereof without Buyer’s prior written approval.


Control of Defense Against Third-Party Claims

Silent18%


Seller's Defense Rights44%


Buyer Controls Defense but Seller May Have Consultation Rights

34%(19% in 2010 Eur. Study)

Other Arrangement*5%


Indemnification

* Example of other arrangement: Sellers shall be entitled to participate in (but not control) the defense of any external claim with its own counsel and at its own expense.


None

Other*

Environmental

Employment

Taxes

32%

37%

53%

9%

18%

Stand-Alone Indemnities (items for which indemnification specifically provided regardless of

indemnification for breaches of representations and warranties)

Indemnification

* Other stand-alone indemnities concerned specific indemnities for fines and penalties, IT & IP matters and specified litigation.

(Subset: deals with survival provisions)


Security for Payment of Seller’s Indemnification Obligations

Indemnification

* Examples of other security arrangements: parent guarantee, holdbacks on the purchase price.

No Security Mechanism

51%

Security Mechanism

49%

(Subset: security mechanism included)

Other*

BankGuarantee

Third-PartyEscrow

Arrangement

(23%)

(6%)

(37%)

50%

27%

47%





Escrow/Holdbacks

* Includes deals where the escrow/holdback is the exclusive remedy but with one or more exceptions.

Indemnification

(Subset: deals with survival provisions)

Escrow/Holdback Is Exclusive Remedy

10%

No Escrow/Holdback33%

Escrow/Holdback Is Not Exclusive Remedy*

57%


Escrows/Holdbacks as % of Transaction Value

Indemnification

(Subset: deals with determinable escrows/holdbacks)


Escrows/Holdbacks as % of Transaction Value (statistical summary)

Indemnification

(Subset: deals with determinable escrows/holdbacks)

Mean

Median

Minimum

Maximum

9% 8.53%

0.40%

25.00%


Private Target M&A Studies Comparative Data re Indemnification

Indemnification


Study Includes Basket 95% 91%

Threshold Basket Only 31% 66%

Combination Threshold Basket and Deductible 5% 12%

Deductible Only 59% 13% Cap on Indemnification: 93% 96%

Cap = purchase price 7% 13%

Silent or express no Cap 7% 4%

Indemnification expressly stated to be Exclusive Remedy of Buyer (subject to Carve Outs) 92% 67%

Includes Pro-Sandbagging Provision 41% 22%


Dispute Resolution


Dispute Resolution Mechanism

Courts*36% Mediation

Then Arbitration

3%

Arbitration61%

ICC Rules13%

National / Local

A rbitration Bodies85%

Ad-hoc Arbitration**

2%

Arbitral Rules Chosen

Dispute Resolution

(Subset: arbitration, with or without mediation)

* Includes one deal with no dispute-resolution clause. ** Represents one deal in which a local arbitration institution was the appointing

authority in case of failure to appoint an arbitrator, but its rules were not applicable to the proceedings. *** Does not reflect provisions, if any, in chosen arbitration rules re allocation of expenses.

Silent78%

Determined by the

Arbitrator(s)15%

Loser Pays5%

Split Evenly2%

Provisions in SPA re Expenses***(71% in 2010 Eur. Study)

64%


Private Target M&A Studies Comparative Data re Dispute Resolution

Dispute Resolution


Alternative dispute resolution (mediation and arbitration)

Mediation then arbitration 2% Arbitration (without mediation) 16%

Mediation then arbitration 3% Arbitration (without mediation) 61%

Of deals choosing abitration:

- Arbitral rules applicable

AAA 50%

JAMS 28%

Other 22%

National/ local arbitration bodies 85%

ICC 13%

Ad-hoc arbitration 2%

- Provisions in agreements re allocation of expenses

Determined by the arbitrator(s) 0%

Loser pays 38%

Split evenly or apportioned 34%

Silent 28%

Determined by the arbitrator(s) 15%

Loser pays 5%

Split evenly 2%

Silent 78%


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2013 European Private Target M&A Deal Points Study · M&A Market Trends Subcommittee, Mergers &...

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