UNIT 2 Flashcards

Question

CIM generally includes a description and commentary of the following:

Answer 1

[1] Top customers and suppliers [2] Summary of financial results and projections; [3] List of competitors and a summary of opportunities in the market place; [4] Ability and plan to achieve future projections; [5] Future growth opportunities; [6] Barriers to entry from competitors; [7] Strength of management team; and [8] Scalability of operations

Answer 2

[1] Strategic purchaser [2] Private equity purchaser Note: It’s important to understand who you’re pitching to. In the CIM, you’re pitching to both types of purchasers, so make sure to include things that would interest both groups

Answer 3

Purchaser that is in the industry, has operational expertise. Therefore, likely interested in customers and suppliers, market share, etc. In addition, since they are already in the industry may be a lot of redundancy in management and thus employment agreements are important so you can terminate those employees

Answer 4

Purchasers who do not have operational experience, therefore need strong management team/employees

Answer 5

[1] More applicable for when the vendor has already lined up a purchaser - A LOI is a lot less competitive than a CIM; CIM is a competitive process, whereas LOI is more of a private, less competitive matter, created between the 2 parties (the potential purchaser and seller) - Usually for smaller purchase – i.e. $50 million [2] Can be called a "memorandum of understanding" - NOT a sale document [3] Useful to frame the parameters of the deal - Demonstrates the parties’ agreement to certain key terms for the transaction - Need to have some parameters on the deal terms to move forward, but need some flexibility since due diligence hasn’t yet been completed. A way to bridge expectations. - Purchaser and vendor should have a good idea coming in as to what the major terms of the deal are expected to be. Otherwise, the lawyers will spin their wheels and bill out a whole bunch of fees that the client could have otherwise avoided

Answer 6

Vendor finds potential buyer (maybe through broker but often not). The potential buyer and vendor draft a LOI between themselves that is intended to frame the terms of a potential future agreement if the purchaser chooses to buy the company after doing due diligence Note: first step is to sign a Confidentiality Agreement

Answer 7

Non-binding terms are used to come to a general agreement on what should be in a purchase agreement, but parties should be prepared to be flexible as the deal progresses. Includes: [1] The subject matter of the sale – ex. “it is our intention to purchase all the shares of target co” [2] Structure (asset vs share deal) [3] The price and terms of payment [4] Key representations and warranties [5] The material conditions of closing – positive and negative covenants [6] Can also include indemnification provisions – what happens if the deal goes bad (Idea is that these terms set up the framework for a future deal - parties should be flexible as the deal progresses)

Answer 8

These are typically in all LOIs - whether binding or non-binding... [1] A period of exclusivity in dealing with a particular buyer (“no-shop”) - Can include “fiduciary out” clause for vendor, and a “break fee and right to match” clause for purchaser - Really important to a purchaser. While the purchaser is spending time and money investigating whether they want to buy the TC, the TC can’t sell to another party (both shares and assets) - Exclusivity agreement may provide the potential purchaser with the option to match an unsolicited offer, or may prohibit all outside offers during the period which the LOI is in place. DEPENDS ON DRAFTING [2] Access for due diligence [3] Allocation of responsibility for expenses involved in closing the transaction - Ex:. if really want to do deal, say you will pay for the first bit of the transaction [4] Rules for public announcements - Ex: disclosure requirements under securities law for public companies [5] Outside “drop dead” date to enter into a definitive purchase agreement – so other party doesn’t stall for better deal [6] Expense reimbursement and work fee if the transaction does not proceed – possibly break-up fees - If the deal doesn’t close because of something the other side does, then they must pay a break-up fee [7] Confidentiality provisions – built right into LOI if a separate confidentiality agreement has not already been executed - Can also have a stand-alone confidentiality agreement, outside of the LOI - Parties may enter into a confidentiality agreement, then vendor will disclose some information (at least enough info for the purchaser to formulate a LOI), then after LOI is entered into, full disclosure is provided [8] Non-solicit of customers and employees (if not in separate confidentiality agreement) - i.e. don’t exploit confidential info like employee salaries or customer base to steal employees / customers [9] Conduct of the business in the ordinary course [10] Certain boilerplate provisions – ex: agreement governed by the law of AB

Answer 9

LOIs typically contain both non-binding and binding provisions [1] Use caution to ensure it is not a binding purchase agreement – the name is irrelevant if the conditions for a contract are met. [2] Make sure it can’t be mistaken for an offer; LOI should state in clear and unambiguous language that it is non-binding - "This letter is not intended to evidence or give rise to any legally enforceable obligations whatsoever or any liability of any kind whatsoever, whether arising in contract, tort, by fiduciary obligation, or otherwise." [3] Clearly state conditions under which parties intend to be bound (e.g. letter is subject to due diligence; board or other approval; completion of legally binding documentation; etc.) - “Would be" vs. "will" or "shall”; "this letter vs. "this agreement”; "it is intended" vs. "it is agreed”

Answer 10

DETERMINED BY CONTENT NOT NAME - The name (calling it a LOI) is irrelevant if the conditions for a contract are met - Whether the LOI is a binding agreement is determined by resorting to the basic principles of contract law (An invitation to treat is not binding: an ITT expresses interest in a transaction and in further negotiations but is subject to the creation of formal binding documentation upon the conclusion of negotiations) - Don’t want your LOI, as a whole, to be considered a binding contract (Purchaser will generally be hurt the most if the LOI is deemed to be binding)

Answer 11

[1] LOI should state in clear, simple and unambiguous language that it is non-binding (if that is the intent). - "This letter is not intended to evidence or give rise to any legally enforceable obligations whatsoever or any liability of any kind whatsoever, whether arising in contract, tort, by fiduciary obligation, or otherwise." [2] Clearly state conditions under which parties intend to be bound (e.g. letter is subject to due diligence; board or other approval; completion of legally binding documentation; etc.) [3] Drafting considerations: be as clear as you can – use clear language, for example: - “non-binding provisions are set forth in paragraphs…”; “binding provisions are…” - “purpose of this letter is to set out mutual understanding which will provide for…” as opposed to “purchaser shall” - “would be" vs. "will" or "shall“; "this letter” vs. "this agreement”; "it is intended" vs. "it is agreed“

Answer 12

[1] Material change or a decision to implement a material change [2] Special considerations apply to public companies that are subject to continuous disclosure.

Answer 13

[1] Ensures that all confidential information is held in confidence & not used for any purpose other than transaction in question - Very important in protecting the vendor’s information from being abused - Standard in Canada before discussing a deal [2] Set out: (1) what information is confidential and (2) the terms upon which confidential information will be shared [3] Often deal with the non-solicitation of employees and customers for a stipulated period of time, among other issues - May include remedies available in the event the prospective purchaser misuses information - Many are “catch and release” = take a broad approach initially and “release” anything down below in the agreement

Answer 14

``` [1] Purpose and permitted Uses [2] Information covered 2(a) - Confidential Information 2(b) - Confidentiality Obligations [3] Non-Solicit [4] Remedies [5] Duration ```

Answer 15

[1] Purpose to facilitate due diligence - Vendor must disclose information for a prospective purchaser to consider a bid. But this need must be balanced with the need to keep information controlled and protected from abuse [2] Temporary permission to use (unless deal proceeds) controlled exchange of information - No transfer of ownership of this information – it’s like a limited license - As recipient you get no rights in the information [3] Permitted use should be drafted with a limited scope so as to restrict use and protect disclosing party - Should not be usable for another deal - Limit scope to include only information relevant to allow the prospective purchaser to evaluate the potential purchase of the company

Answer 16

[1] Prevents purchaser from contacting customers, suppliers or hiring employees for stipulated period of time - I.e. no poaching [2] Often there may be a number of exceptions including responding to ads, use of a headhunter, etc.

Answer 17

Particularly where there is an indemnity clause in the CA [1] Damages: can sue for breach of contract (because confidentiality agreement = a contract) [2] Injunction: prevents the party from disclosing information - The ability to go after equitable relief is a key provision to have in a confidentiality agreement - Why? (i) Because it is difficult to immediately quantify the type of damages (loss or reputation, etc.) and the scope of damages (ii) Because it allows you to stop the party immediately and seek damages later (remedy process is long; the more information that is leaked, the more damages occur and the harder the quantification = better to stop the dissemination of that information than wait and seek damages)

Answer 18

[1] Often indefinite, or between 1 and 2 years [2] Often depends on the nature of the items in question (Ex: technology companies often have a shorter period because of the evolving nature of the industry) [3] If the agreement is silent on the matter, then the duration is forever (indefinite) [4] Requirements to return or destroy info on conclusion of negotiations or termination

Answer 19

[1] Typically includes: (i) All information in any form (written/oral) obtained by the receiving party in context of transaction (ii) Derivatives of such info (ex: analysis, notes/other documents prepared by receiving party based on such information) [2] Exclusions: (i) Information that is or becomes publicly available through no fault of receiving party - -> If info is already out in the public domain, makes no sense to protect its’ confidentiality. (ii) Where the receiving party can establish that information is already known to it at the time of its disclosure and is not known by receiving party to be the subject of an obligation of confidence (iii) Receiving party can establish information was independently developed without any use of or reference to the “confidential information” (iv) That receiving party receives information without an obligation of confidence of any kind from a third party (and in possession of such third party free of any obligation of confidence) (v) Permitted disclosures: may want exceptions that allow the prospective purchaser to disclose information to their bank, investors, lawyers, etc.

Answer 20

[1] Typically includes: (i) No use of information other than permitted use (i.e. for evaluating a transaction) (ii) Maintain the confidentiality of the information (iii) Maintain appropriate security measures and manage information flow - -> Standard of care is reasonableness – treat it as if it was your own confidential information (iv) Permitted disclosures: lawyers, accountants, and disclosure that is legally required pursuant to a court order, securities law or stock exchange rules, or regulators - -> Financing may be an issue as target may not want information disclosed to lenders - -> For these, disclosing party will usually require written notice and opportunity to seek a protective order or other appropriate remedy (so that they can ensure as little info as possible is disclosed) (v) Confidential considering the deal or entering into the confidentiality agreement - -> Note: A provision that says “all items that are marked as confidential are confidential” should not be put in because it should be the premise that everything is confidential [2] Exclusions: (i) Disclosure that is legally required pursuant to a court order - -> To the extent legally permitted, disclosing party will usually require written notice and an opportunity to seek a protective order or other appropriate remedy - -> General process is that the prospective purchaser would have to tell the disclosing party to give the disclosing party as much notice as possible so they could make a protective order application to the court (ii) Permitted Disclosures (i.e. lawyers, accountants) - -> Financing may be an issue as target may not want info disclosed to lenders. (iii) Carve-outs for disclosure required by securities law or stock exchange rules (iv) Carve-outs for disclosure required by regulators

UNIT 2 Flashcards

(44 cards)