Enforcing Your Deal

Enforcing Your DealPresenter: William A. Price, Attorney at Law, www.growthlaw.com

Part I: Contract Terms CONTAINING Reps and Warranties

Contract Representations and Warranties I: Essentials

• Duly organized entity in good standing• Authority in signer and company to do deal• Capital structure permits deal: clause also

defines whose votes needed: complete corporate book attached, with permissions

• No third party rights or liens that could prevent or void the deal

• Good title to all property in deal

Representations and Warranties II: Enforceable Financials

• Financial statements accurate, current, follow GAAP

• Real property, capital equipment, other asset schedules are accurate

• Equipment is in good repair except for ordinary wear and tear

• All taxes paid, no returns due, no tax authority liabilities/investigations pending

Representations and Warranties III: Disclosures

• No undisclosed liabilities• Complete A/R schedule is attached• Complete A/P schedule is attached• All taxes paid, no returns due, no tax authority

liabilities/investigations pending• No questionable payments/illegal operations• Finders fees for deal n/a or scheduled

Representations and Warranties IV: No Material Changes

• No material adverse change in business• No sales not in ordinary course • No casualty loss beyond defined amount• No change in managers or other key

employees• No liability settled or incurred not in

ordinary course

Representations and Warranties V: No Material Changes, Continued

• No change in a/p outside of ordinary course• No debt or other obligation beyond $ limit• No delay of dividend or other capital

return/change of capital structure• No change in employment contracts or terms• No other material non ordinary agreements

Representations and Warranties VI: Intellectual Property

• Company IP (patents, trademarks, copyrights, trade secrets, etc…) is all current/still protected

• Company owns all IP/no 3d party permission needed to use same

• No infringement by Company of 3d party IP rights• No IP royalties or other payments due• No IP claims or other litigation pending or known

Representations and Warranties VII: Contracts And Claims

• Complete schedule of material contracts attached• No lawsuits or administrative actions pending, settlements

in force, judgments due (or scheduled)• Insurance contracts and schedules are in force as

attached• No product liability or warranty claims known or likely• Employee benefit plans and relations good/in compliance,

plans scheduled, no strikes or claims likely (or scheduled)

Part II: Contract Terms LIMITING Reps and Warranties

Representations and Warranties Limits

• Routine Lawyer Argument/Negotiation • Big Firms Argue For ABA Percentage Loss

Limits For all Reps And Warranties: Small For No Limits

• Additional Terms To Protect Seller

ABA Terms Survey

• Annual Or Biennial Survey• Deals Covered Usually $10 million plus in

amount/annual sales of companies involved

• Firms Surveyed Are National/Big Regional Law

ABA Terms Survey 2013

• “Private Target Mergers Deal Points” title• Working capital adjustments to purchase

price most common adjustment in deals• Seller earnouts in 25% of 2012 deals• All liabilities covered in liabilities rep in 77%

of 2012 deals, not just GAAP liabilities


• “Compliance With Law” rep down significantly (33% of 2012 deals, vs. 77% 2010)

• “Material Adverse Effect” not defined by dollar amounts in 2012 deals, was earlier (but see cuffs/collars discussion below)


• “Cuffs” time limit for non-essential representations: 18 months limit in 44% of deals 2012: fraud usually an exception to time limits

• “Collars” or “Baskets” limited amount recoverable for non-essential reps/warranty breaches to %ages of deal (mini-baskets possible for specific claims within a rep, such as min. $5k/claim)

• De minimis amount of total deal (0.5% or 1%) often required for any rep or warranty claims


• “Cuffs” time limit for non-essential representations: 18 months limit in 44% of deals 2012: fraud usually an exception to time limits

• “Collars” or “Baskets” limited amount recoverable for non-essential reps/warranty breaches to %ages of deal (mini-baskets possible for specific reps): 10% overall cap same for 2012, 2010 deals

• De minimis amount of deal (0.5% or 1%) often required for any rep or warranty claims

Additional Reps And Warranties Limits Terms To Protect Sellers

• “No Sandbag”: No relief for items disclosed to buyer/known to buyer before or during due diligence

• CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990) a warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. Indeed, the warranty's purpose is to relieve a promisee from the obligation of determining a fact's truthfulness. “No Sandbag” eliminates this protection for buyers with some evidence showing deal problems

Purchase Price Escrows To Protect Buyers

• Escrow Of Purchase Price Amount For Post-Closing Adjustments/Rep and Warranty Claims Period

• Amount only average 7.14% of 2012 deals, down from 9+% earlier years: Amounts in escrow up to $10 million average for ABA survey deals 2012

Part III: Dispute Resolution Options

Representations And Warranties Insurance

• 800 or so of 40K plus deals worldwide in 2014: Significant increases year over year

• Common demand in smaller public company deals, where speed needed

• Premium 2-5% of amount protected, usually the purchase price

Alternative Dispute Resolution

• Arbitration clauses are very common in business contracts: avoids “home court” advantage if there is a dispute: Review where arbitration could occur, too: travel is expensive

• Only 17% of ABA survey deals made loser pay arbitration costs

Alternative Dispute Resolution

• Some parties leave IP dispute resolution to courts/USPTO, not inexpert arbitrators

• Note Bunge v. Northern Trust Co (623 N.E.2d 785, 252 Ill.App.3d 485, 191 Ill.Dec. 195, IL Ap. 4 Dist 1993): Courts enforce wording vs drafter of warranty: General warranty of validity does not require word “infringement” for patent infringement to be breach of warranty

Fraudulent Transfer Lawsuits

• Later-discovered seller or related party transfers

• Uniform statute, attorney’s fees and other relief beyond contract possible

• 2 year statute of limitations (from event, or discovery of fraud, varies)

Sue The Intermediaries

• Business valuation opinions, opinions of counsel, accounting statements all produce litigation

• Note Geaslen v. Berkson, Gorov & Levin, Ltd., (581 N.E.2d 138, 220 Ill.App.3d 600, 163 Ill.Dec. 187, IL Ap. 5 Dist 1991): Professional has “duty of care” in preparation of opinion, not one of investigation beyond scope of opinion

Sue Interlopers, Or Win On Reps And Warranties If Seller Waffles

• Third parties often decide to take over a seller if they hear about a deal: CF Texaco v. Pennzoil intentional interference w. contract tort $8+ billion damages, punitives

• But CF. Indeck v. Norweb, (735 N.E.2d 649, 316 Ill. App.3d 416, 249 Ill.Dec. 45, , IL Ap. 1 Dist 2000): Seller warranty breached when 3d party right of first refusal (agreement disclosed, not exercise of same) exercised: no 3d party interference, since just exercising rights

Questions?William A. PriceAttorney at Law, [email protected]

http://www.growthlaw.com/

Enforcing Your Deal

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