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					Negotiating Preliminary
Agreements – Pitfalls to
Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark
Speaker Profile

                  Nicole E. Clark is a Partner in
                  the Corporate section of
                  Vinson & Elkins and focuses
                  on public and private
                  mergers, acquisitions and
                  divestitures; securities
                  offerings; and corporate
                  governance matters. She
                  can be contacted at
                  713.758.3344 or via email at

Preliminary Agreements

•   Confidentiality Agreements (CAs)
•   Standstill Agreements
•   Exclusivity Agreements
•   Letters of Intent (LOIs)

Preliminary Agreements

Practice Tip:

• Business people may view preliminary agreements as
  ―standard‖ or ―boilerplate.‖

• To help avoid unintended consequences, lawyers
  should get involved early in the transaction.

Confidentiality Agreements
Basic Elements

 Definition of ―confidential information‖
 Obligation to protect the information
 Return of information
 Disclaimer of obligation to negotiate/consummate
 Disclaimer of warranty
 Unilateral vs. bilateral
 Definition of ―representatives‖
 Term/integration
 Access to employees

Confidentiality Agreements
Basic Elements

Other possible provisions:
  •   Prohibition on soliciting or hiring personnel
  •   Most-favored nations clause
  •   No clubbing
  •   Standstill (if a public company target)
  •   Exclusivity

Definition of Confidential Information

• Typically, broadly defined to include all information concerning
  the business and affairs of seller that will be disclosed to the
  recipient, including materials prepared by the recipient

• Specific identification of confidential information

• Exclusions to the definition
   –   Already in possession of recipient
   –   Becomes publicly available (other than through any breach by the
       recipient of the CA)
   –   Independently developed by recipient
   –   Exception when required by law or court order

Definition of Confidential Information

•   Sensitive information may include:
    – Trade secrets
        •   Term on confidentiality obligation can thwart required efforts to maintain
        •   Disclosure to one party can have effect vis-à-vis third parties
        •   Defer disclosure
        •   Buyers should consider having CAs assigned
        •   Consult with IP counsel
    –   Privileged documents
        •   Disclosure may create risk of waiver
        •   Consider discussion among lawyers rather than provision of documents
        •   Consider ―common interest‖ language if disclosure necessary
            –    But note that this language may flag the issue for third parties
        •   Consult with litigation counsel

Definition of Confidential Information

• Disclosures to competitors may create antitrust risks
  –   Pricing or other competitively sensitive information
  –   Potential approaches:
      • Exclude sensitive information from disclosures
      • Identify materials that will not be disclosed
      • Limit disclosure to recipient’s personnel not in a position to
          violate antitrust laws
      • Defer disclosure until late in the process
      • Avoid mutual exchanges
  –   Be aware that express provision in CA may flag the issue
  –   Consult with antitrust counsel

Obligation to protect the information

• Limited purpose
  –   ―assist the bidder and its representatives in connection with a
      possible negotiated transaction‖
  –   ―possible‖ in order to avoid implication that there is an
      agreement in principle
  –   ―negotiated‖ in order to reinforce that the company’s purpose
      is to facilitate a process which it controls and that it would be a
      breach for bidder to make a hostile bid (if target is a public
• Agreement not to use the information
  ―in any way detrimental to the Company‖
  –   Viewed as broad by recipients
Obligation to protect the information

• Enforcement
  –   Acknowledgment that money damages are insufficient
  –   Express inclusion of injunctive relief and specific performance
      (non-exclusive remedy)
  –   Governing law
  –   Consent to jurisdiction of a specific court

Return of Information

• Return or destroy
  –   At bidder’s or seller’s option?
• Bidder may request to have the right to keep one copy
  (usually by its outside counsel)
• Electronic data rooms
• Email


• Who is covered?
   –   Private equity bidders may be especially sensitive to the inclusion of
       ―affiliates‖ in definition
• Disclosure on a ―need to know‖ basis
• Bidder may seek to limit obligations for actions of its
• Execution of acknowledgements

• ―Clubbing‖ concerns
   –   Definition of representatives may expressly exclude other equity
       participants; additional provisions may also prohibit clubbing
   –   Definition of representatives may expressly exclude potential lenders
       unless identified; additional provision may prevent bidders from
       exclusive use of a debt financing source


• Seller’s form may not include any term provision
• Bidder will seek to limit (e.g., for 1-2 years)
• Consider the type of the information disclosed
  –   Trade secrets – specified term can thwart required efforts to
      maintain secrecy
• Consider varying survival, if warranted
• Consider delaying disclosure of the most sensitive
• Integration clause in definitive agreement
  –   CA to be modified or superseded

Non-solicit of Employees

• Non-solicitation of employees
  –   Generally see 6 months – 2 years
  –   Bidder may want to limit to those introduced through process
  –   Exception for general solicitation or employees laid-off by
• Non-solicitation clauses that extend to customers and
  suppliers could be a ―back-door‖ non-compete

Most-favored nations clause

• Bidder negotiates to receive most preferential terms
  granted to any other bidder.
• Seller will want to retain flexibility to respond to bidders
  depending upon their individual circumstances.
  –   For example, in the public company context, if a bidder
      already has commenced a tender offer, the company may
      agree to a CA without a standstill with such bidder and
      arguably it should not have to agree to waive its standstill with
      another bidder merely because the other bidder had obtained
      a most favored nations clause

Standstill (if a public company target)

• Agreement by bidder to not pursue an acquisition of
  the target other than by negotiating with the target’s
  management and the board for a specified period
  –   Prohibitions on acquisition of target securities
  –   Prohibitions on proxy solicitations
  –   Restrictions on requests for waivers
• Advantages for target:
  –   Avoid hostile offer
  –   Greater control over auction process
  –   Avoiding public disclosure
• Advantages for bidder:
  –   Access to non-public information

• Bidder may seek to limit the standstill so that it will
  terminate if a third party proposes to acquire the target

• In two recent cases, bidders who had executed a
  standstill were precluded from making topping bid

• Important to note that even if there is not an explicit
  standstill provision, receipt of material non-public
  information (for example, projections) and/or limited
  use clause may restrict bidder from proceeding on a
  hostile basis

Exclusivity Agreements

• Agreement by potential seller to deal exclusively with
  one potential buyer for a specified period of time
• Buyer may require before investing a significant
  amount of time and expense in due diligence and
• Shift in leverage
  –   Seller may desire to negotiate for as many material terms as it
      can upfront, in exchange for exclusivity, when its leverage is
• Buyer may ask for notification of unsolicited offers

Letters of Intent

• Used to outline the material terms of a proposed
  –   Usually signed by both parties (as opposed to a term sheet)
  –   Almost always intended to be non-binding, except for certain
      limited terms (such as confidentiality, exclusivity, expenses)

Letters of Intent

• Advantages to using an LOI
  –   Creates a roadmap
  –   Helps to expose any ―deal breakers‖
  –   May enhance parties’ commitment/ moral obligation to the
  –   Solidifies understanding - helps to avoid ―selective memory‖
  –   May be useful to buyer in seeking financing
  –   Can help facilitate earlier compliance with regulatory

Letters of Intent

• Disadvantages
  –   For a public company it may create an obligation to disclose
      the proposed transaction before the parties would otherwise
  –   Risk of unintended consequence of being construed as a
      binding agreement
      • Pennzoil v. Texaco — $11 billion damage award against
           Texaco over its tortious interference with Pennzoil’s
           memorandum of agreement to acquire an interest in Getty
  –   Risk of unintended consequence of having an obligation to
      negotiate in good faith

Letters of Intent

Courts found obligation to negotiate in good faith when:
• The parties did not state expressly an intention to be bound or not
   –   Party’s reservation of right of approval to its board of directors did not
       leave it free to abandon the transaction
• Language in the LOI
   –   LOI stated that the parties ―shall make every reasonable effort to
       agree upon and have prepared‖ a contract setting forth the terms and
       conditions of a merger to be agreed upon
• Conduct of the parties after executing the LOI
   –   Court noted that oral assurances, reliance and awareness of reliance
       was substantial enough to establish a triable claim under promissory
       estoppel doctrine

Letters of Intent

• To avoid unintended consequences
  –   Be explicit and precise as to intent to be bound or not
      • Specify provisions that are binding and precise remedy for
  –   If further negotiations are contemplated, a court may find a
      duty to continue to negotiate in good faith
      • To avoid uncertainty, parties may choose to affirm this
           duty or to expressly reject it
  –   State that each party bears its own expenses whether or not
      definitive agreement is reached
  –   Specify period for future negotiation

Negotiating Preliminary
Agreements – Pitfalls to
Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark

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