DRAFTING REPS AND WARRANTIES IN BUSINESS TRANSACTIONS First Run Broadcast: April 7, 2015 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Representations and warranties are a marquee feature of virtually every significant transactional document. They are particularly vital in stock and asset acquisitions, and when obtaining a commercial loan or an equity investment. The buyer, lender or investor conducts often extensive due diligence on the company but wants specific assurances about important facts about which only the company would have the best information. These facts – the absence of liabilities or the presence of certain things giving rise to value – can be few in number or vast, and they vary according the facts of the transaction. But without reps and warranties about those matters the transaction would never close; and, if those facts are incorrect, the transaction would lose its value. This program will provide you with a real-world guide to the differences between reps and warranties, drafting both in important transactions, and understanding the varying remedies of both.

• Drafting reps and warranties in asset and stock sales, loans, and equity financings • Differences between reps and warranties, and the contractual and tort remedies of both • Relationship between diligence and reps and warranties – and what the law says about

how one impacts the other • Provisions covering revenue projections, financial statements, and customer lists • Reps and warranties concerning tangible and intangible property – title, taxes, transfer

restrictions • Capital structure, authorization, and contracts • Understanding the limits of reps and warranties – what you can ask for, what you can get

Speaker: Robert Wollfarth is of counsel in the New Orleans office of Baker, Donelson, Bearman, Caldwell & Berkowitz P.C, where he represents large and small clients across the country with a wide variety of business matters. His practice includes start-up formation, mergers and acquisitions, federal, state and local tax planning and controversy, financing projects and operations, restructuring, buy-outs and dissolution. Mr. Wollfarth received his B.S. from Tulane University and his J.D. and LL.M. from New York University School of Law.

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Drafting Reps & Warranties in Business Transactions Teleseminar April 7, 2015 1:00PM – 2:00PM

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USING REPRESENTATIONS ANDWARRANTIES IN M&A AGREEMENTS

Rob WollfarthBaker, Donelson, Bearman, Caldwell &Berkowitz, PC201 St. Charles Avenue,Suite 3600New Orleans, LA 70170Direct: 504.566-8623Fax: 504.585.6923E-mail: rwollfarth@bakerdonelson.comwww.bakerdonelson.com

Presentation Topics

Using representations and warranties (“reps and warranties”) in mergersand acquisitions to allocate risk between the buyer and the seller,including, specifically,

I. Definition and purpose of reps and warrantiesII. Relationship of reps and warranties to due diligenceIII. Scope and timing requirements for the accuracy of reps and

warrantiesIV. Typical qualifications on reps and warrantiesV. Typical limitations on recovery for breach of reps and warrantiesVI. Sample pro-buyer and pro-seller reps and warranties

What are Reps? What are Warranties?

• Basic definition: They are each statements by the seller as to the quality,condition, existence, value and/or nature of the assets that the buyer isacquiring from the seller and if such statements turn out not to be true, thebuyer can claim breach of the acquisition agreement and seek a remedy againstthe seller for his losses.

• The distinction between reps, on the one hand, and warranties, on the other, islargely a distinction without a difference.

Purpose of Reps and Warranties

• Reps and warranties are part of a package meant to contractuallyallocate risk between the buyer and the seller.

• Without reps and warranties, the parties are left only with whateverimplied warranties there are under the applicable state's law thatgoverns the acquisition agreement.

Relationship of Reps and Warranties to DueDiligence

• Due diligence is an investigation of the legal, financial and strategicaspects of the target.

• Both reps and warranties and due diligence are needed in anacquisition.

• However, both have their limitations.

When must the Reps and Warranties be True?

• At signing?

• At closing?

• Both?

How Truthful must the Reps and Warranties be?

• In all respects?

• In all material respects?

• Except for inaccuracies of reps or warranties the circumstances givingrise to which, individually or in the aggregate, do not constitute andcould not reasonably be expected to have a Material Adverse Effect?

• What if the reps and warranties already have materiality qualifiers builtin to them?

Typical Qualifications of Reps and Warranties

• Knowledge

• Material Adverse Effect

• No Other Representations and Warranties

• Non-Reliance

Knowledge Qualifier

• Within the rep or warranty, the seller will indicate that he is making therep or warranty based on his knowledge by inserting in the rep orwarranty, "to my knowledge.”

• Sellers will negotiate for actual knowledge.

• Buyers will negotiate for constructive knowledge of specified personssuch as officers.

Material Adverse Effect Qualifier

• Sample Provision. Within the rep or warranty, the seller will state that the fact

represented or warranted is true except to the extent its untruthfulness would

not have a materially adverse effect on the business, assets, liabilities,

capitalization, condition (financial or other), results of operations or prospects

of target.

• Buyer will negotiate for

• “could not reasonably be expected to have” and

• adding that there would be no MAE on (i) seller’s ability to consummate

the acquisition, or (ii) Buyer’s ability to operate the target immediately

after closing in the manner operated by seller before closing.

• Seller will negotiate for

• dollar amount threshold and

• carve outs for force majeure-type events

No Other Reps and Warranties

•Sample provision:

Except for the reps and warranties contained in [section of acquisition

agreement containing seller’s reps 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 rep or warranty, either written or oral, on behalf of seller or

the target.*

*Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

Non-Reliance by Buyer

• Sample provision:

Buyer acknowledges and agrees that the seller has not made and isnot making any reps or warranties whatsoever regarding the subjectmatter of the acquisition agreement, express or implied, except asprovided in [section of acquisition agreement containing seller’s repsand warranties], and that it is not relying and has not relied on anyreps or warranties whatsoever regarding the subject matter of theacquisition agreement, express or implied, except for the reps andwarranties in [section of acquisition agreement containing seller’sreps and warranties].*

*Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

Limiting Recovery for Breaches of Reps and Warranties

• Disallowing sandbagging by buyer

• Limiting rep and warranty survival period

• Excluding certain kinds of damages from recovery

• Applying baskets to indemnification claims

• Requiring eligible indemnification claims exceed threshold

• Capping recoverable damages

• Providing that indemnification is exclusive remedy

Anti-sandbagging Provision

• Meaning of Sandbagging. If the buyer is allowed to sandbag, then even if thebuyer discovers a breach of a rep or warranty prior to closing buyer coulddecide to close and then make a claim for breach of the rep or warranty.

• The buyer will negotiate for the right to bring an indemnification claimnotwithstanding any investigation conducted or any knowledge acquired bybuyer at any time, whether before or after the execution and delivery of theacquisition agreement or the closing date.

• The seller will negotiate for an anti-sandbagging provision which providesthat no party shall be liable for any losses resulting from or relating to anyinaccuracy in or breach of any rep or warranty if the party seekingindemnification for such losses had knowledge of such breach before closing.

Limitation on Survival Period of Reps and Warranties

• Seller will negotiate for limiting the period over which the buyer can bring aclaim for breach of a rep or warranty.

• Buyer will negotiate for

• the right to bring a claim whenever it discovers a breach no matter howlong after closing or

• at a minimum, carving certain high risk reps and warranties out of thelimited survival period.

• For most deals, where the buyer and seller end up is cutting off buyer's abilityto bring a claim at 12 to 18 months following the closing. Very few deals havesurvival periods of less than 12 months and very few have survival periodsexceeding 18 months.

Limitation on Types of Recoverable Damages

• Limited to out of pocket damages

• Including/Excluding

• Diminution in value

• Incidentals - expenses incurred in dealing with the breach

• Consequentials - losses that are not a direct result of the breach,but a consequence of the breach

• Punitives - damages awarded in a lawsuit as a punishment

Baskets

• Sample Deductible

Seller shall not be required to indemnify buyer for losses until the aggregateamount of all such losses exceeds $300,000 (the “Deductible”) in whichevent seller shall be responsible only for losses exceeding the Deductible.*

• Sample First Dollar

Seller shall not be required to indemnify buyer for losses until the aggregateamount of all such Losses exceeds $300,000 (the “Threshold”) in whichevent seller shall be responsible for the aggregate amount of all losses,regardless of the Threshold.*

• Sample CombinationSeller shall not be required to indemnify buyer for losses until the aggregateamount of all such losses exceeds $500,000 (the “Threshold”) in which eventseller shall be responsible only for losses in excess of $300,000 (the“Deductible”).*

• Carve outs. Certain reps and warranties can be carved out of these.*Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

Eligible Claim Threshold

• Sample provision:

Seller shall not be required to indemnify buyer for any individualitem where the loss relating to such claim (or series of claimsarising from the same or substantially similar facts orcircumstances) is less than $_______.*

*Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

Cap on Recoverable Damages

• Purchase price

• Amount less than purchase price

• Some other amount

• Can negotiate to carve out certain reps and warranties

Indemnification as Exclusive Remedy

Except perhaps in the case of fraud or any other types of claims that theapplicable law does not allow parties to limit by contract, the buyer is notallowed to seek remedies outside of what is written in the acquisitionagreement.

Standard Rep and Warranty Package

• Organization• Authorization• Non-contravention• Brokers’ Fees• Capitalization• Title to Shares• Investment• Title to Assets• Financial Statements• Events Subsequent to

Most Recent Fiscal Year End• Undisclosed Liabilities• Legal Compliance• Tax Matters• Real Property• Intellectual Property• Tangible Assets• Inventory• Contracts• Notes and Accounts Receivable

• Insurance• Litigation• Product Warranty• Product Liability• Employees• Employee Benefits• Guaranties• Environmental, Health and

Safety Matters• Customers and Suppliers• Disclosures

Standard Reps and Warranties

• Sample Reps:

• Organization of Certain Sellers. Seller (if a corporation or other entity) is duly organized, validly existing, and in

good standing under the laws of the jurisdiction of its incorporation (or other formation).

• Authorization of Transaction. Seller has full power and authority …. This Agreement constitutes the valid and

legally binding obligation of seller, enforceable in accordance with its terms and conditions. Seller need not give any

notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental

agency …. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby

have been duly authorized by seller.

• Non-contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions

contemplated hereby, will (A) violate …. (B) conflict with, result in a breach of, constitute a default under, result in the

acceleration of, create in any party the right to …. or (C) result in the imposition or creation of a Lien upon or with

respect to target shares.

• Brokers' Fees. Seller has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with

respect to the transactions contemplated by this Agreement.

Capitalization (for stock acquisition)

• Sample Rep:

All of the authorized capital stock of the target consists of _______ targetshares, of which _______ target shares are issued and outstanding and_______ target shares are held in treasury. All of the issued and outstandingtarget shares have been duly authorized, are validly issued, fully paid, andnon-assessable, and are held of record by the seller. There are no outstandingor authorized options, warrants, purchase rights, subscription rights,conversion rights, exchange rights, or other agreements or commitments thatcould require target to issue, sell, or otherwise cause to become outstandingany of its capital stock. There are no outstanding or authorized stockappreciation, phantom stock, profit participation, or similar rights withrespect to the target.

Title to Shares (for stock acquisition)

• Sample Rep:

Seller holds of record and owns beneficially the number of target shares setforth next to his, her, or its name in Section ____ of the Disclosure Schedule,free and clear of any restrictions on transfer (other than any restrictions underthe Securities Act of 1933 and state securities laws), Taxes, Liens, options,warrants, purchase rights, agreements, commitments, equities, claims, anddemands. Seller is not a party to any option, warrant, purchase right, or otheragreement or commitment (other than this acquisition agreement) that couldrequire seller to sell or transfer any capital stock of the target. Seller is not aparty to any voting trust, proxy, or other agreement or understanding withrespect to the voting of any capital stock of the target.

Investment (for stock acquisition)

• Sample Rep for Buyer:

Buyer is not acquiring the target’s shares with the intent to sell them in connectionwith any distribution within the meaning of the Securities Act of 1933.

• Sample Rep for Seller if Seller is Receiving Notes from Buyer:

Seller (A) understands that the buyer’s notes have not been, and will not be,registered under the Securities Act of 1933, or under any state securities laws,and are being offered and sold in reliance upon federal and state exemptions fortransactions not involving any public offering, (B) is acquiring the buyer’s notessolely for his, her, or its own account for investment purposes, and not with aview to the distribution, (C) is a sophisticated investor with knowledge andexperience in business and financial matters, (D) has received certain informationconcerning the buyer and has had the opportunity to obtain additionalinformation as desired in order to evaluate the merits and the risks inherent inholding the buyer’s notes, (E) is able to bear the economic risk and lack ofliquidity inherent in holding the buyer’s notes, and (F) is an accredited investor.

Title to Assets

• Sample Pro Buyer Rep:

The target has good and marketable title to, or a valid leasehold interest in, the properties and assetsused by it, located on its premises, or shown on the Most Recent Balance Sheet or acquired after thedate thereof, free and clear of all liens, except for properties and assets disposed of in the ordinarycourse of business since the date of the Most Recent Balance Sheet.

• Sample Pro Seller Rep:

The target has good title to, or a valid leasehold interest in, the material tangible assets they useregularly in the conduct of its business.

• Additional Pro Buyer Rep Regarding Tangible Assets:

The target owns or leases all buildings, machinery, equipment, and other tangible assets necessary

for the conduct of its business as presently conducted and as presently proposed to be conducted.

Each such tangible asset is free from defects (patent and latent), has been maintained in accordance

with normal industry practice, is in good operating condition and repair (subject to normal wear and

tear), and is suitable for the purposes for which it presently is used and presently is proposed to be

used.

Financial Statements

• Sample Rep (Bold reflects added pro buyer language):

Attached hereto as Exhibit ____ are the following financial statements (collectively the “Financial

Statements”): (i) audited consolidated balance sheets and statements of income, changes in

stockholders' equity, and cash flow as of and for the fiscal years ended _______ _______, _______,

_______, _______, _______, _______, _______, _______, and _______ _______, _______ (the

“Most Recent Fiscal Year End”) for the target; and (ii) unaudited consolidated balance sheets and

statements of income, changes in stockholders' equity, and cash flow (the “Most Recent Financial

Statements”) as of and for the months ended _______ _______, _______ (the “Most Recent Fiscal

Month End”) for the target. The Financial Statements (including the notes thereto) have been

prepared in accordance with GAAP throughout the periods covered thereby, present fairly the

financial condition of the target as of such dates and the results of operations of the target for such

periods, are correct and complete, and are consistent with the books and records of the target

(which books and records are correct and complete); provided, however, that the Most Recent

Financial Statements are subject to normal year-end adjustments (which will not be material

individually or in the aggregate) and lack footnotes and other presentation items.

Events Subsequent to Most Recent Fiscal Year End

• Sample Pro Buyer Rep:

Since the Most Recent Fiscal Year End, there has not been any MaterialAdverse Change. Without limiting the generality of the foregoing, since thatdate:

[listing of events that have not occurred]

• Sample Pro Seller Rep:

Since the Most Recent Fiscal Month End, there has not been any MaterialAdverse Change. Without limiting the generality of the foregoing, since thatdate the target has not engaged in any practice, taken any action, or enteredinto any transaction outside the ordinary course of business.

Undisclosed Liabilities

• Sample Pro Buyer Rep:

Neither Target nor any of its Subsidiaries has any Liability except for (i)Liabilities set forth on the face of the Most Recent Balance Sheet (rather thanin any notes thereto) and (ii) Liabilities that have arisen after the Most RecentFiscal Month End in the Ordinary Course of Business (none of which resultsfrom, arises out of, relates to, is in the nature of, or was caused by any breachof contract, breach of warranty, tort, infringement, or violation of law).

• Sample Pro Seller Rep:

Target has no liability of the nature required to be disclosed in a balancesheet prepared in accordance with GAAP except for…*

*Language taken from 2013 Private Target Mergers & Acquisitions Deal Points Study by ABA M&A Market Trends Subcommittee

Legal Compliance

• Sample Pro Buyer Rep:

The target, and its predecessors have complied with all applicable laws (including rules,

regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder

and including the Foreign Corrupt Practices Act, 15 U.S.C. 78dd-1 et seq.) of federal, state, local,

and non-U.S. governments (and all agencies thereof), and no action, suit, proceeding, hearing,

investigation, charge, complaint, claim, demand, or notice has been filed or commenced against the

target alleging any failure to comply.

• Sample Pro Seller Rep:

To the knowledge of any seller, the target has complied with all applicable laws (including rules,

regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder)

of federal, state, local, and non-U.S. governments (and all agencies thereof), except where the

failure to comply would not have a Material Adverse Effect.

Tax Matters

• Sample Pro Buyer Rep:• Can be much more extensive including reps regarding:

• that all taxes dues and owing have been paid• withholding obligations• possibility of audits• waivers of statutes of limitations• amount of unpaid taxes

• Sample Pro Seller Rep:The target has filed all income tax returns that it was required to file,and has paid all income taxes shown thereon as owing, except wherethe failure to file income tax returns or to pay income taxes would nothave a Material Adverse Effect.

Litigation

• Sample Pro Buyer Rep (bold reflects added pro buyer language):

Section ____of the Disclosure Schedule sets forth each instance in which the target (i) is subject toany outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a party or isthreatened to be made a party to any action, suit, proceeding, hearing, or investigation of, in, orbefore (or that could come before) any court or quasi-judicial or administrative agency of anyfederal, state, local, or non-U.S. jurisdiction or before (or that could come before) anyarbitrator. None of the actions, suits, proceedings, hearings, and investigations set forth inSection ___ of the Disclosure Schedule could result in any Material Adverse Effect. None ofthe sellers and the directors and officers (and employees with responsibility for litigationmatters) of the target has any reason to believe that any such action, suit, proceeding, hearing,or investigation may be brought or threatened against the target or that there is any basis forthe foregoing.

• Sample Pro Seller Rep:

adds in at the end “except where the injunction, judgment, order, decree, ruling, action, suit,proceeding, hearing, or investigation would not have a Material Adverse Effect”

Customers and Suppliers

• Sample Pro Buyer Rep:

(i) Section _____of the Disclosure Schedule lists the target’s _______ largestcustomers for each of the two most recent fiscal years and sets forth opposite the nameof each such customer the percentage of net sales attributable to such customer.Section _____ of the Disclosure Schedule also lists any additional current customersthat the target anticipates shall be among the _______ largest customers for the currentfiscal year.

(ii) Since the date of the Most Recent Balance Sheet, no material supplier of the targethas indicated that it shall stop, or materially decrease the rate of, supplying materials,products or services to the target, and no customer listed on Section ______ of theDisclosure Schedule has indicated that it shall stop, or materially decrease the rate of,buying materials, products or services from the target.

10b-5/Full Disclosure Representation

• 10b-5 Formulation:The representations and warranties contained in this Section ____ donot contain any untrue statement of a material fact or omit to state anymaterial fact necessary in order to make the statements andinformation contained in this Section _____ not misleading.

• Full Disclosure Formulation:Seller does not have knowledge of any fact that specifically applies toseller (other than general economic or industry conditions) and thatmay materially adversely affect the assets, business, prospects,financial condition or results of operations of the seller that has notbeen set forth in this acquisition agreement.