Negotiating M&A and Joint Venture Deals

Rome, 8 June 2005

Index of Contents:

• Section 1 Evaluating the deal

• Section 2 The due diligence process

• Section 3 The structure of the SPA

• Section 4 The Price

• Section 5 The Closing

• Section 6 Interim Management

• Section 7 Representations and Warranties

• Section 8 Indemnification Clause

• Section 9 Structure of the SHA/Capital Structure/shareholder funding

• Section 10 Corporate Governance provisions

• Section 11 Mechanisms of deadlock resolution

Case Study:

A transaction involving the purchase of a 51% stake in a non listed Italian company

1. Evaluating the deal Negotiations and early stage agreements

• Confidentiality Agreement

• Letter of Intent

• Exclusivity or Standstill letter

• Memorandum of understanding

• Auction process vs. one-on-one negotiation (including data room rules, etc.)

Good faith

as driving principle of pre contractual negotiations (in civil law countries)

2. The due diligence process

Analisys under a tax, accounting, financial business, environmental and legal point of view of the target company’s

business – inc. exam of documentation

The Aim is to :

assess the risks/critical areas of the business and of the Company;

determine the value of the target company/asses quality of its management;

evaluate whether to proceed with the transaction and on what terms and conditions.

Linkage between due diligence (disclosure) and Seller’s warranties/indemnities in the SPA and its attachments

3. The structure of the SPA(Share Purchase Agreement)

SPA is normally structured as a binding (sometimes conditional) agreement with deferred implementation at Closing

Main provisions regulate:

Conditions precedent (e.g. antitrust/other regulatory approval)

Price determination and payment;

Management of the company in the interim period;

Closing events;

Representations and warranties;

Indemnification provisions;

Dispute resolution;

[The corporate governance provision (possibly)

The mechanism to solve deadlocks. In SHA]

4. The Price

The contractual price may be:  

determined in a fixed amount;

determinable on the basis of certain formula (which may vary

depending on the shareholding’s evaluation criteria adopted: i.e

criterio patrimoniale, reddituale o finanziario – NAV, DCF, etc.);

mixed, partially determined and partially determinable and

uncertain (linked to the occurrence of certain circumstances,

eventually containing an earn-out component); with possible

third party determination, in part (also as a means to overcome

possible conflicting views between the parties)

5. The Closing

Reasons for the signing/closing structure of M&A deals: assumption of all the contractual obligations upon signing

deferral to closing of the actual implementation of the transaction i.e. transfer

of shares and payment of price

lag of time required for occurrence of condition precedent to closing such as:   

Antitrust clearance;

Granting of licenses, authorizations and permits, etc;

Carrying out communications and consultancy procedures required by

law or contract;

Lapse of pre-emption rights of other shareholders;

Approval of transaction by the necessary corporate bodies;

Achievement of certain results (such as net financial position).

6. Interim Management

General undertaking of the Seller to manage the Company in

the Interim period between signing and closing

in a diligent and ordinary manner,

in accordance with past practice  

As a result,

no extra-ordinary transaction are allowed unless with

Buyer’s approval

7. Representations and warranties

Are representations and warranties essential?

Yes, because

• Implied warranties (i.e. seller’s warranties provided for by law) are not always offered by legal systems in relation to the Company’s net worth, underlying assets and business activities

• E.g. Italian case law: Implied warranty is provided for only with respect to the (title and quality of) the shares

• Other remedies under general principles of law may be of little practical use

WHY TO INSERT AN INDEMNITY CLAUSE

IN ADDITION TO THE REPS AND WARRANTIES?

Because the indemnity clause clarifies Buyer’s right to damages (also where the breach of the warranty is not imputable to the Seller)

Because, in addition to indemnification for breach of reps & warranties, the indemnity clause may cover the occurrance of specific events identified in the course of the due diligence process the risk of which is assumed by the Seller

Because it introduces specific limits and measures (de minimis, deductibles and caps)

8. Indemnification Clause

9. CORPORATE GOVERNANCE PROVISIONS(more tipically contained in Shareholders’ Agreement )

Applicability where one party acquires/retains partial stakes in

a Company. They might include:

Right to designate a certain number of directors/auditors

Reserved matters / veto rights at shareholders' meeting and

board of directors’ level;

Dividend policy;

Right to receive periodical reporting on the company’s

management and results

Preemptive rights, drag along/tag along provisions

10. Mechanisms of deadlock resolution

 What is a deadlock? 

A deadlock occurs when a resolution (which is determined

as being essential to the Company's activity) on certain

reserved matters

is not approved by the required majority and

no agreement thereon is reached among the

relevant shareholders within a certain timeframe