ROADMAP OF AN M&A TRANSACTION ASSOCIATION OF CORPORATE COUNSEL PRESENTATION BY VINCE GAROZZO, GREENSFELDER HEMKER & GALE, P.C.

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1 ROADMAP OF AN M&A TRANSACTION ASSOCIATION OF CORPORATE COUNSEL PRESENTATION BY VINCE GAROZZO, GREENSFELDER HEMKER & GALE, P.C.

2 OUTLINE Review of the M&A Transaction Process Letters of Intent and the Duty to Negotiate in Good Faith The Effect of a Merger on the Attorney-Client Privilege Materiality Scrapes Sandbagging

3 OVERVIEW AS PRESENTED IN YOUR SMALL DEPARTMENT S ROADMAP TO A DEAL ACC DOCKET DECEMBER 2012 Timeline of a Deal Assemble Your Team Confidentiality Agreement Letter of Intent Begin Due Diligence Determining the Structure of the Agreement Signing the Agreement Closing

4 LETTERS OF INTENT Recall An LOI outlines the preliminary agreement among the parties with respect to key terms of the transaction. New Developments Even when provisions of an LOI are clearly identified as non-binding, they may be enforceable as a binding contract if the parties agreed to negotiate the outstanding material terms of the LOI in good faith. An LOI should explicitly set forth which terms are binding and which terms are non-binding. A plaintiff can recover expectation damages for breach of a duty to negotiate in good faith based on an expressly non-binding LOI.

5 SIGA Technologies, Inc. v. PharmAthene, Inc. 1 Supreme Court of Delaware, May 2013 Although the [term sheet] itself is not signed and contains a footer on each page stating Non Binding Terms, the record supports the conclusion that incorporation of the [term sheet] into the Merger Agreement[] reflects the intent on the part of both parties to negotiate toward a license agreement with economic terms substantially similar to the terms of the [term sheet] if the merger was not consummated A.3d 330 (Del. 2013).

6 TAKE-A-WAY An LOI should (1) state that it is non-binding, and (2) disclaim any requirements to be bound by a particular term or to be required to reach any agreement. Drafters may also consider limiting the remedies to preclude lost profits or recovery for anything other than a breach of any binding terms specifically included within the LOI. The parties should pay particular attention to agreements to negotiate in good faith.

7 ATTORNEY-CLIENT PRIVILEGE AND THE CORPORATE MERGER As explained in Roadmap to a Deal One type of deal structure is a merger, where two companies are combined into one entity that assumes the assets and liabilities of the two merging entities. In a typical transaction, the seller makes certain representations and warranties, which form the foundation for any indemnification claims in the case of a breach by the seller.

8 NEW DEVELOPMENTS: GREAT HILL EQUITY PARTNERS IV V. SIG GROWTH EQUITY FUND I 2 Delaware Court of Chancery, November 2013 Under Delaware law, absent an express carve-out, the attorney-client privilege of the selling corporation over all pre-merger communications including those relating to the negotiation of the merger itself pass to the surviving corporation in a merger. 2 Civ. Action No CS (Nov. 15, 2013).

9 TAKE-A-WAYS Why it Matters Recommendation A buyer may attempt to use privileged communications to seek indemnification for a breach of a representation or warranty after closing. If a seller wishes to keep its communications privileged after the closing, it should include an express carve-out provision in the merger agreement excluding attorneyclient communications from the assets transferred to the surviving entity.

10 THE MATERIALITY SCRAPE And its Effect on Indemnification

11 INDEMNIFICATION & MATERIALITY SCRAPES Recall A seller usually attempts to limit certain representations and warranties by using a materiality qualifier. For example, Seller is not a party to any material litigation.

12 MATERIALITY SCRAPES For purposes of Seller s indemnification obligations under this ARTICLE X, all of the representations and warranties set forth in this Agreement that are qualified as to material, Material Adverse Effect or other similar qualifications shall be deemed to have been made without any such qualification for purposes of determining (i) whether a breach of any such representation or warranty has occurred, and (ii) the amount of losses resulting from, arising out of or relating to any such breach of a representation or warranty. This is an example of a double materiality scrape.

13 Hudson s Bay Company Luxembourg, S.A.R.L. v. JZ LLC 3 Delaware Superior Court, 2013 Materiality Scrape Provision: In determining whether there has been any breach of or any inaccuracy in any representation, warranty, covenant or agreement for purposes of [indemnification] and in determining the amount of any Covered Loss, any references to material, materially, or Material Adverse Effect in such representation, warranty, covenant or agreement shall be disregarded. Holding: The materiality scrape language was clear and unambiguous and directs a court to disregard any references to material from any representation or warranty set forth in the SPA. 3 No. N10C , 2013 WL (Del. Super. Ct. March 11, 2013).

14 VIEWS ON THE MATERIALITY SCRAPE Buyer s Perspective: Pro-Materiality Scrape Seller s Perspective: Anti-Materiality Scrape Fill the indemnity basket Reduce post-closing disputes regarding materiality Transfer risk to seller Streamline negotiations Prevent buyer from seeking indemnification for minor breaches Reduce burden to disclose all (even immaterial) information to buyer Keep risk on buyer

15 SANDBAGGING AND ITS EFFECT ON INDEMNIFICATION

16 3 APPROACHES TO SANDBAGGING Pro-Sandbagging (Buyer) Anti-Sandbagging (Seller) Silence

17 PRO-SANDBAGGING EXAMPLE The right to indemnification, payment, reimbursement, or other remedy based upon any such representation, warranty, covenant, or obligation will not be affected by any investigation conducted or by any Knowledge acquired at any time, whether before or after the execution of this Agreement or the Closing Date, with respect to the accuracy of, or compliance with, such representation, warranty, covenant, or obligation.

18 ANTI-SANDBAGGING EXAMPLE Seller shall not be liable under this Article X [Indemnification] with respect to any Losses arising out of matters within the Knowledge [as defined in the Agreement] of Buyer at the Closing Date."

19 Universal Entertainment Group, L.P. v. Duncan Petroleum Corp. 4 Delaware Court of Chancery, July 2013 Under Delaware law, a breach of contract claim is not dependent on a showing of justifiable reliance. Holding: Plaintiff was entitled to damages for breach of warranty in the acquisition agreement, even though plaintiff knew that the warranties were inaccurate prior to the closing date. On the fraud claim, Plaintiff failed to establish justifiable reliance. 4 CV 4948-VCL, 2013 WL (Del. Ch. July 1, 2013).

20 CONCLUSION COMMENTS? QUESTIONS?

CORPORATE LITIGATION: THE EFFECTIVENESS OF NON-RELIANCE PROVISIONS. Underlying Principles

CORPORATE LITIGATION: THE EFFECTIVENESS OF NON-RELIANCE PROVISIONS JOSEPH M. MCLAUGHLIN AND YAFIT COHN * SIMPSON THACHER & BARTLETT LLP April 15, 2016 This month we continue our discussion of contractual