Emerging Trends in M&A Practice

Transcription

1 Emerging Trends in M&A Practice IP Reps, Warranties, and Insurance, Oh My! Matthew Heinz, Aon Risk Services, Inc. Greg Leibold, Merchant & Gould P.C. Trent Martinet, Davis Graham & Stubbs LLP

2 Agenda General IP Reps & Warranties Target Company Third-party IP Open Source Reps & Warranties Data Security & Privacy Reps & Warranties General Considerations Data and Laws Types of Data Security & Privacy Reps & Warranties Reps and Warranties Insurance Basics Rationale Case Study

3 General IP Reps & Warranties Target Company IP Complete list of IP Ownership/assignment Present assignment language Assignments recorded, where appropriate Complete list of licenses/encumbrances of target IP List of all registrations, maintenance, office action responses due in next 90 days

4 General IP Reps & Warranties Third-Party IP Existing/previous threats Current licenses from third parties Assignability Non-infringement Knowledge qualifiers Knowledge of the IP vs. knowledge of the infringement

5 General IP Reps & Warranties Third Party IP Infringement Knowledge Qualifier Comparison: To the Knowledge of Company, neither (i) the Company s use of Company Intellectual Property; nor (ii) the Company s manufacture, use, sale, offer for sale, importation or other commercialization of present or proposed Company products or services infringes upon, misappropriates, conflicts with, or violates any rights of any other Person. versus... To the extent the Company has Knowledge of such rights, neither (i) the Company s use of Company Intellectual Property; nor (ii) the Company s manufacture, use, sale, offer for sale, importation or other commercialization of present or proposed Company products or services infringes upon, misappropriates, conflicts with, or violates any rights of any other Person.

6 Open Source Reps & Warranties Open Source Software List of all open source software files and associated licenses Distinguish between internal use and distribution Viral effect heightened if open source included in distributed products/services Buyers resist knowledge qualifiers in rep/warranty Management may legitimately not know Consider third-party vendor scan

7 Data Security & Privacy Reps & Warranties General Considerations for Data Security & Privacy Reps & Warranties Understand the nature of the target business Understand the type of data collected, stored, or used by the target business Understand the use of the data

8 Data Security & Privacy Reps & Warranties General Considerations for Data Security & Privacy Reps & Warranties (cont.) Understand the privacy and data security laws/issues associated with that business and any associated data or information Understand the degree/extent of potential liability based on the data or information collected and the applicable laws

9 Data Security & Privacy Reps & Warranties Data and Laws Examples of potential sources of data Special types of data Potential sources of legal obligations

10 Data Security & Privacy Reps & Warranties Types of Reps & Warranties Existence of and compliance with privacy and data security programs General compliance with privacy and data security laws and regulations Compliance with specific privacy and data security laws or security standards

11 Data Security & Privacy Reps & Warranties Types of Reps & Warranties Absence of complaints, litigation or internal investigations regarding data security, privacy or personal information Absence of data security breaches Security measures taken to protect systems, data, and information

12 Reps & Warranties Insurance - Basics Reps & Warranties Insurance can insure either buyers or sellers in M&A transactions for liability arising out of a breach of a rep or warranty about the target company or business Buyer-side policy pays the buyer directly for such losses and can be used to supplement or replace the seller s escrow / indemnification cap Seller-side policy reimburses the seller for such losses and can be used to backstop the seller s escrow / indemnification cap R&W Policies can cover all reps & warranties in Purchase Agreement, including the Financial Statements Structure depends on objectives of parties Coverage is used strategically to enhance a buyer s bid or to streamline a seller s exit

13 Reps & Warranties Insurance - Rationale Buyers Increase maximum indemnity / extend survival period for breaches of reps & warranties Distinguish bid in auction Protect key relationships (particularly in the context of a management rollover) Ease collection concerns Provide recourse when no seller indemnity possible (public company sales, ESOP, bankruptcy) Sellers Reduce or eliminate post-closing indemnity obligations for breach of R&W, including related escrows Reduce contingent liabilities Distribute sale proceeds Protect passive sellers Expedite sale process Attract best offers by maximizing ability to indemnify

14 Reps & Warranties Insurance - Case Study Situation Hypothetical w/o Insurance ($400,000,000) Sale Price with Insurance ($400,000,000) A US private equity firm was preparing to sell a $400M manufacturing company through an auction process The target was the last of 15 divestitures of a holding company, and had numerous hanging indemnities from past sales, plus tax (NOLs) and environmental issues Seller desired to effect the sale on an as is basis and have no surviving indemnities or escrow post-closing Solution Before the auction began, Aon structured and obtained quotes for a package of reps and warranties, tax and environmental insurance in favor of Buyer Bidders were told to work with Aon and Seller made it known that it would provide no indemnities The R&W policy covered hanging liabilities from prior transactions and reps related to the current transaction The SPA had no survival and provided a credit against purchase price for the insurance cost (1% of transaction value) Seller achieved more bids and a better sale price than anticipated; the added benefit was that by the insurers vetting of these risks, the buyer side due diligence process was much smoother, simpler and contributed to the successful auction $360M (proceeds at closing) $396M (proceeds at closing) $40M Escrow (10% assumed) $4M Premium $40M R&W Protection