Drafting and Documentation DOCUMENTING THE TRANSACTION FROM START TO FINISH

Letters of Intent / Term Sheets  Purpose  Outline Key Terms  Identify Deal Breakers  Help avoid misunderstandings  Binding vs. Non-Binding  Some Binding Terms: confidentiality, expenses  Good faith obligations to negotiate? (Courts Split; Remedies for Breaches)  Caution about Binding; Remedies

Due Diligence  Legal, Financial, and Operational Diligence  Objectives:  Confirm buyer’s understanding  Assure legal title  Investigate potential liabilities or risks  Confirm/Assess value  Identify transition/integration issues  Understand business operations  Identify impediments (3 rd party consents and approval)  Determine ancillary documents needed

Structuring the Deal  3 Main Structures  Asset Purchase  Equity/Stock Purchase  Merger

Structuring the Deal  Asset  Acquire specified assets from the target  Leave behind pre-closing liabilities of the target (avoiding known and unknown liabilities  Transitional Issues  3 rd party consents  Transitional and Administrative issues (e.g., payroll, sales tax and licenses, anything tied to EIN)  Requires stockholder approval (by what threshold? Majority? Supermajority? Unanimous?

Structuring the Deal  Stock / Equity  Acquire all assets and liabilities (whether known or unknown)  Requires stockholders consent by selling their shares  May result in fewer transitional issues and 3 rd party consents  Capital gains treatment for sellers  increases due  Taxes (Income, Sales, Employment Withholdings)  Employment Related Claims  Employee Benefits administration

Structuring the Deal  Merger  Two Party Mergers (Forward)  Triangular (Forward and Reverse)  Triangular Merger can insulate the buyer from target’s liabilities  Tax  Forward and forward-triangular mergers treated as asset sales (treated as a liquidation of the target)

Structuring the Deal  Successor Liability  Buyer of assets does not assume the liabilities of the seller.  Exceptions:  The buyer expressly or impliedly assumes the liabilities  The transaction is deemed a de facto merger under state law  The transfer was fraudulent or intended to defraud creditors  The buyer is a mere continuation of the seller

What are you Buying / Selling  In an Asset Sale:  Describe and list (in an Exhibit/Schedule) the assets that you are buying  Explicitly exclude the assets you are not buying  Explicitly state the liabilities you are assuming (if any)

Price and Payment  Form of Payment  Cash  Financing  Bank; SBA  Seller Financing  Property  Earnout  Allocation of Purchase Price  Purchase Price Adjustments

Reps / Warranties and Disclosure Schedules  Purpose :  Disclose material information about the parties and the assets being sold and the liabilities being assumed  Allocate risk between the parties  Serve as the foundation for an indemnification claim in case of a breach  Impact a party’s obligation to close the transaction or right to terminate the agreement before closing and walk away  The parties are often required to make representations again as a condition to closing.

Reps / Warranties and Disclosure Schedules  Ways to limit Reps/Warranties  Materiality (e.g., Seller is not party to any material legal action)  Knowledge (e.g., to the knowledge of the Seller)  Time (From _____ to the Closing Date, there have been none of the following actions taken)  Scheduled information: reps and warranties can be limited by references to the disclosure schedules

Covenants  Pre-Closing  Operation of Business; Preservation of Assets/Company  Employees  No shop  Confidentiality  Post-Closing  Bulk Sale Laws  Non-Compete/Non-Solicit  Consulting and Employment Arrangements  Announcements

Sign and Delayed Closing  Needed when:  Underwriting for a loan requires a signed agreement  Approval of 3 rd parties (e.g., governmental authority, material contracts to be assigned, etc.)  Termination  Closing Conditions

Indemnification  What is it? Post-closing remedy for losses incurred under the Purchase Agreement  Failure to perform covenant  Breach/inaccuracy of Reps/Warranties  Procedure  Notification of claims  Control of Litigation  Control of Settlement

Indemnification  Limitations  Caps  Maximum Liability under the Purchase Agreement  Thresholds, Baskets, and Deductibles  Amount Needed before a claim can be brought  Survival Periods  Expiration of when claims can be made or forfeited  Exceptions/Carveouts

Indemnification  Sandbagging  Materiality Scrapes  Funding the Indemnification  Escrow  Holdbacks

Miscellaneous  Choice of Law  Entire Agreement  Dispute Resolution  Assignment  Broker Fees  Representative  Specific Performance

Final Wrap Up & Questions DOCUMENTING THE TRANSACTION FROM START TO FINISH