Presenting a live 90‐minute webinar with interactive Q&A

M&A Letters of Intent: M&A Letters of Intent: Strategies for Sellers and BuyersCrafting Preliminary Deal Terms and Conditions

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 11, 2011

Today’s faculty features:

B. Scott Burton, Partner, Sutherland Asbill & Brennan, Atlanta

Mark D. Williamson, Principal, Gray Plant Mooty, Minneapolis

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program.

• Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Continuing Education Credits FOR LIVE EVENT ONLY

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• Close the notification box

• In the chat box, type (1) your company name and (2) the number of attendees at your location

• Click the SEND button beside the box

Tips for Optimal Quality

S d Q litSound QualityIf you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-869-6667 and enter your PIN when prompted Otherwise please send us a chat or e mail when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key again.

M&A Letters of Intent: Strategies for Sellers and Buyers

B. Scott BurtonMark D. Williamson

October 11, 2011

Letter of IntentLetter of Intent

• What Is It?What Is It?– Generally a brief document indicating the parties’

intention to proceed with the negotiation of a definitive agreement

– Contains the basic terms of the proposed dealTypically a nonbinding document (although– Typically a nonbinding document (although sometimes containing binding provisions)

– Sometimes referred to as (and perhaps formatted as) ( p p )a “term sheet,” a “memorandum of understanding” and sometimes, the seemingly oxymoronic “preliminary agreement”

6

preliminary agreement

Attorney’s RoleAttorney s Role• Advising client on the utility of and issues g y

relating to an LOI• Attorney should review and comment on letter of

intent before it is signedintent before it is signed– Critical to make sure binding and nonbinding

provisions are drafted properlyBusiness people often take the first attempt at• Business people often take the first attempt at an outline or term sheet to be converted into the letter of intent

• Sometimes terms that may be vigorously negotiated when lawyers are present may be conceded by the business people

7

conceded by the business people

Is a Letter of Intent Necessary?Is a Letter of Intent Necessary?

• A letter of intent is not necessary and notA letter of intent is not necessary and not always desirable.

• Parties can proceed directly to the drafting• Parties can proceed directly to the drafting and negotiating of a definitive agreement without signing a letter of intentwithout signing a letter of intent.

• Alternative: Use short, non-binding term h t ith b i d l tsheet with basic deal terms.

8

Why Consider a Letter of Intent?Why Consider a Letter of Intent?

• Is the client a motivated Seller or Buyer?Is the client a motivated Seller or Buyer?• Is there an immediate need to begin diligence?• Is exclusivity crucial?Is exclusivity crucial?• Is the transaction too detailed/complex to begin

negotiation of the “definitive” deal document?negotiation of the definitive deal document?• Are approvals (e.g., from investors, lenders,

regulators) needed for the deal?egu ato s) eeded o t e dea• Is a timeline/deadline crucial?

9

Advantages of UsingL f ILetters of Intent

• Isolates and memorializes key deal points or y pidentifies deal breakers

• Provides a map and timeline for the transaction• Governs the parties’ relationship to the signing• Governs the parties relationship to the signing

of definitive documents• Provides a vehicle for binding obligations (e.g., g g ( g ,

exclusivity, expense allocation, confidentiality)• Can be used with regulators (e.g., HSR filing),

financing sources and other constituenciesfinancing sources and other constituencies• Demonstrates the seriousness of the parties• Creates “moral commitment”

10

Disadvantages of UsingL f ILetters of Intent

• Certain provisions can lead to loss of leveragep g– For Seller, exclusivity provision– For Buyer, too much detail on deal terms

• May inadvertently create a binding agreement• May inadvertently create a binding agreement as to certain deal points along with potential liability

f• May create a duty to negotiate in good faith• Potentially triggers public disclosure obligation if

bindingbinding • Nonbinding nature of letters of intent does not

always justify the expenditure of time and money

11

Typical Provisions of a Letter of IntentTypical Provisions of a Letter of Intent

• Form of Transaction– Stock Purchase– Asset Purchase– Merger or Reorganization

• PriceAmount– Amount

– Form of consideration/timing of payments (cash, stock, earnout, promissory notes, etc.)

– Source of funds– Escrow

Purchase price adjustments

12

– Purchase price adjustments

Typical Provisions of a Letter of Intent (cont.)Typical Provisions of a Letter of Intent (cont.)

• Other Material Terms– Extent of representations and warranties– Indemnification obligations– Non-compete obligationsp g– Key employment issues

• Conditions to TransactionCompletion of Buyer’s due diligence– Completion of Buyer s due diligence

– Receipt of necessary financing– Execution of definitive agreements

No material change in Seller’s business or results– No material change in Seller s business or results– Receipt of third party/governmental consents

• Milestones/Benchmarks

13

Typical Provisions of a Letter of Intent (cont.)Typical Provisions of a Letter of Intent (cont.)

• Other ObligationsOther Obligations– Buyer’s right to investigate and have access

to businessto business– Exclusive Dealing/“No-Shop” Clause (with a

possible fiduciary out if a public target)possible fiduciary out if a public target)• Break-up Fee?

– Confidentiality obligations (unless separate y g ( pconfidentiality agreement was signed)

– Ordinary course conduct of business

14

y

Provisions of a Letter of IntentProvisions of a Letter of Intent

• Contractual “boilerplate”Contractual boilerplate – Choice of law

Venue selection– Venue selection– Merger clause

Responsibility for expenses– Responsibility for expenses– Termination provisions/survival provisions

Si t– Signature

15

Letters of Intent:Th B ’ P iThe Buyer’s Perspective

• Exclusivity – eliminate other biddersy– No-shop provisions– Notice of other approaches

• Expense Reimbursement/Break-Up Fee?Expense Reimbursement/Break Up Fee?• Access to Information

– Books and RecordsM t i l C t t– Material Contracts

– Real Estate – Customers

E l– Employees– Advisors (e.g., outside counsel for litigation assessment)

• Operating Covenants

16

Letters of Intent:Th S ll ’ P iThe Seller’s Perspective

• Seller’s leverage may be highest at this point in g y g pa transaction

• Preservation of Confidentiality (if not previously dd d)addressed)

• No-Hire/Non-Solicitation of EmployeesSubject Employees– Subject Employees

– Possible Exceptions• Limited Access to Information/PersonnelLimited Access to Information/Personnel• Reverse Diligence of Buyer• Other Specific Terms/Transaction Details

17

p

Letters of Intent:L l P i i lLegal Principles

• Binding vs NonbindingBinding vs. Nonbinding– Letter of intent should be clear on whether or

not parties intend document to be bindingnot parties intend document to be binding.– Parties’ intent is generally upheld if properly

stated.stated.– Often the parties want certain provisions to be

binding and others to be nonbinding.g g

18

Binding vs NonbindingBinding vs. Nonbinding

• If there is a manifest intention that formalIf there is a manifest intention that formal agreement is not to be complete until reduced to formal writing, there is no binding contract.

• Courts will look at language of letter of intent to determine if parties intended to be bound.

• Courts sometimes look to the conduct of the parties to determine if there was an intention to b b dbe bound.

19

Binding vs NonbindingBinding vs. NonbindingTexaco, Inc. v. Pennzoil Co.• Memorandum of agreement with Pennzoil to purchase

Getty Oil• Parties issued separate press releases• Parties issued separate press releases

– Announced “agreement in principle”– Stated “transaction is subject to execution of a definitive merger

agreement”agreement• Subsequently, Texaco made better offer• Board withdrew its counter-proposal and entered into

agreement with Texaco• Pennzoil sued for intentional interference with contract• Question was whether there was a binding contract?

20

Question was whether there was a binding contract?

Binding vs NonbindingBinding vs. NonbindingTexaco v. Pennzoil (cont.)

T li d b• Test applied by court:(1) Whether a party expressly reserved the right to be bound only when a written agreement was signed; (2) whether there was any partial performance by one party that the ( ) y p p y p yparty disclaiming the contract accepted; (3) whether all essential terms of the alleged contract had been agreed upon; and (4) whether the complexity or magnitude of the transaction was such ( ) p y gthat a formal executed writing would normally be expected.

• Court noted: “Although the intent to formalize an agreement is some evidence of an intent not to be bound before signing such a writing, it is not conclusive. The issue of whether the parties intended to beit is not conclusive. The issue of whether the parties intended to be bound is a question of fact to be decided from the parties acts and communications.”

21

Binding vs NonbindingBinding vs. NonbindingTexaco v. Pennzoil (cont.)• Reviewed press release

– Worded in indicative terms (“seller will”), not subjunctive or hypothetical onesR f t f t t t bli h d ti i d t– Reference to future agreement established timing and not a precondition of agreement

• Also evidence indicated that most essential elements were present (most importantly price) even thoughwere present (most importantly, price), even though there were other open terms (e.g., guarantees).

• Court concluded that there was sufficient evidence to support jury verdict finding that there was a contractsupport jury verdict finding that there was a contract.

• However, jury damages award was reduced from $10.7 billion to $3 billion.

22

Binding vs NonbindingBinding vs. NonbindingTurner Broadcasting v. McDavid

I l d l f i ll A l H k d Th h• Involved letter of intent to sell Atlanta Hawks and Thrashers• Letter, by its term, expired, but parties continued to negotiate• Georgia Court of Appeals held:

Sufficient evidence that parties had reached an agreement on all– Sufficient evidence that parties had reached an agreement on all material terms and “manifested an intent to be bound.”

– Statute of Frauds did not require that complex, expensive business matters be in writingUpon termination Turner no longer benefited from “nonbinding”– Upon termination, Turner no longer benefited from nonbinding disclaimer

– Evidence sufficient that breach prevented prospective buyer from obtaining approvals and thus buyer was entitled to more than nominal damagesdamages

– Award of $281 million not excessive• Key Takeaway: Ensure that nonbinding nature of letter of intent

survives termination

23

Binding vs NonbindingBinding vs. NonbindingWhite Const. Co., Inc. v. Martin Marietta Materials, Inc.

Whit C t ti l i d th t M ti M i tt ’ d t ft i i f• White Construction claimed that Martin Marietta’s conduct after signing of letter of intent – repeated promises to go through with deal, partial performance by negotiating lease contract – was sufficient to create binding agreement

• The court concluded otherwise noting that the LOI included the following• The court concluded otherwise, noting that the LOI included the following provision, which the court stated unambiguously showed that the parties did not intend to be bound by the letter’s terms:

This nonbinding letter describes the basic terms of the proposed transaction, along with various examinations of [target] that must be concluded to the g [ g ]satisfaction of [Martin Marietta] prior to the execution of the legally binding agreement. THIS LETTER EXPRESSES THE INTENT OF THE PARTIES FOR DISCUSSION PURPOSES ONLY FOR USE IN DRAFTING A DEFINITIVE CONTRACT. THIS LETTER IS NOT INTENDED TO CREATE NOR SHOULD IT BE CONSTRUED AS CREATING ANY LEGAL OBLIGATION TO CONCLUDE THIS TRANSACTION UNDER THE TERMS OUTLINED HEREIN OR ON ANY OTHER TERMS OR CONDITIONS NOR IS IT INTENDED TO CREATE ANY OTHER OBLIGATION EXCEPT FOR THE [EXCLUSIVITY AND CONFIDENTIALITY] OBLIGATIONS...

24

Letters of Intent:D f i C id iDrafting Considerations

• If no binding intent is contemplated, use wordsIf no binding intent is contemplated, use words that clearly indicate no binding intent: “would,” “possible,” “proposed”

• Use binding words only if you mean them: “shall/will,” “must,” “covenant,” “agree”

• Be consistent – use only binding words in the binding parts and nonbinding words in the other parts

• Specify and limit any potential remedy for breach

25

Letters of Intent:D f i C id iDrafting Considerations

• Use explicit disclaimers of nonbinding provisionsp g p• Disclaimers should include provisions like the following:

– Document is nonbinding in every respect and is for discussion purposes only.p p y

– There is no agreement relating to the subject matter, whether written or oral, and there is no agreement to agree.

– The parties will not be bound in any respect unless and until a p y pwritten definitive agreement is signed and executed.

– No past or future action, course of conduct or failure to act relating to a possible transaction, or relating to the negotiation of th t f ibl t ti d fi iti t illthe terms of any possible transaction or definitive agreement, will give rise to or serve as the basis for any obligation on the part of any party.

• Disclaimer should expressly carve out binding provisions

26

• Disclaimer should expressly carve out binding provisions

Letters of Intent:O h C id iOther Considerations

• The “real” intention of the parties is a primary factorp p y• It is not an “all or nothing” proposition – some parts can

be held to be binding, yet other parts not• Surrounding conduct before and after the letter’s• Surrounding conduct – before and after the letter s

execution – can be crucial– verbal/non-verbal communication (e-mails can be loaded

weapons)weapons)– partial performance– press release language

Bottom line realities govern• Bottom line – realities govern– Make sure letter reflects reality and conduct remains consistent

27

Duty to Negotiate in Good FaithDuty to Negotiate in Good Faith

• Alternative claim that is typically separateAlternative claim that is typically separate from breach of contract

• Some courts have found a separate dutySome courts have found a separate duty– Does not exist in all jurisdictions

• Duty does not ensure a deal will be done;Duty does not ensure a deal will be done; rather, it implies directional negotiations to at least try (i.e., no abandonment)y ( , )

• What is the proper measure of damages –reliance damages only?

28

g y

What if It Goes Wrong?What if It Goes Wrong?• Possible Measure of Recoverable Damages

Expectation Damages intended to place the non breaching party in the same– Expectation Damages – intended to place the non-breaching party in the same position as it would have been had the breaching party performed

– Reliance Damages – intended to compensate non-breaching party for expenses incurred in reliance on breaching party’s promise

• To Be Recoverable Damages Must BeTo Be Recoverable Damages Must Be– Capable of calculation within a degree of reasonable certainty– Reasonably foreseeable as a result of a breach at the time the parties enter into

an agreement• What Courts Have DoneWhat Courts Have Done

– Courts have generally held that expectation damages, i.e., lost profits or consequential damages, are not available for the breach of binding provision, such as an exclusivity or non-solicitation provision, contained in a nonbinding preliminary agreement, such as a letter of intent or term sheetOnly a handful of jurisdictions have addressed the issue though and expectation– Only a handful of jurisdictions have addressed the issue though, and expectation damages remain a possibility

29

Recommended Resources: A i l & B kArticles & Books

• Model Stock Purchase Agreement, 2nd Ed., ABA gPublishing (2010) (specifically Ancillary Document B)

• Special Study for Corporate Counsel on Using Letters of Intent in Business Transactions (2010 Edition),Intent in Business Transactions (2010 Edition), Thomson-West (2010)

• Spreen, Kristopher, "Ten Practice Tips for Negotiating the Letter of Intent " Deal Law 13 (May June 2008)the Letter of Intent, Deal Law 13 (May-June 2008)

• The M&A Process – A Practical Guide for the Business Lawyer, ABA Publishing (2005)

• Williamson, Mark D., “Letters of Intent: Their Use in Minnesota Business Transactions,” Minnesota Bench and Bar (November 2007)

30

( )

Recommended Resources: CasesRecommended Resources: Cases• Teachers Insurance and Annuity Association of America v. Tribune Co., 670

F Supp 491 (S D N Y 1987)F.Supp. 491 (S.D.N.Y. 1987)• Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App. Houston 1st Dist.

1987)• Goodstein Constr. Corp. v. City of New York, 604 N.E.2d 1356, 1361 (N.Y.

1992)1992)• Venture Associates Corp. v. Zenith Data Systems Corp., 96 F.3d 275 (7th

Cir. 1996)• Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958 (9th Cir. 2001)

L D W Si C 169 P 3d 1255 (O 2007)• Logan v. D.W. Sivers Co., 169 P.3d 1255 (Or. 2007)• Global Asset Capital v. Rubicon US Reit, Inc., C.A. No. 5071-VCL (Del. Ch.

Nov. 16, 2009)• Turner Broadcasting System v. McDavid, et al., 303 Ga. App. 593, 693

S E 2d 873 (2010)S.E.2d 873 (2010)• White Const. Co., Inc. v. Martin Marietta Materials, Inc., 2009 WL 961135

(M.D. Fla. 2009)

31

FacultyFacultyMark D. Williamson, Principal

Gray Plant Mooty MinneapolisGray Plant Mooty, Minneapolis– Mark practices in the areas of business, corporate, and securities law, with a

focus on mergers and acquisitions. He serves as Co-Chair of the firm’s Mergers & Acquisition Team. He has experience representing both public and private companies and private equity funds in various corporate transactions, including

i iti bli d i t ff i t d ff d d btmergers, acquisitions, public and private offerings, tender offers, and debt financings. Mark.Williamson@gpmlaw.com.

B S tt B t P tB. Scott Burton, PartnerSutherland Asbill & Brennan LLP, Atlanta

– Scott focuses on corporate mergers and acquisitions, corporate finance and securities, and general corporate and securities matters. He heads the firm’s Financial Services Industry Transactional Practice Group His experienceFinancial Services Industry Transactional Practice Group. His experience includes representing buyers and sellers in acquisitions and dispositions of private and publicly held life and property and casualty insurance companies, blocks of insurance business, broker-dealers and investment advisers. scott.burton@sutherland.com.

32