Is that Letter of Intent Binding?

Letters of intent, or term sheets (“LOIs”), are commonly used in M&A and other corporate transactions. However, when discussions between parties breakdown the question often arises, are any of the terms in the LOI enforceable?  A recent Delaware case, SIGA Technologies v. PharmAthene, which has twice been appealed to the Delaware Supreme Court, serves as an important reminder for parties to be intentional when they “agree to agree.” What is an LOI? An LOI typically summarizes the principal deal terms and oftentimes creates the framework from which parties work to reach a definitive agreement.  Parties may decide to execute an LOI for several reasons, including: an LOI may help each party better understand the other’s position on deal terms and structure, in some cases, an LOI may be submitted to regulatory agencies to initiate the approval process, and an LOI simply may be customary in the industry or the type of transaction. LOIs may include provisions regarding the structure of the transaction, the purchase price (including any earn-out component), a timeline for the transaction, key closing conditions, due diligence and access provisions, exclusivity, allocation of transaction expenses and confidentiality, among others. One of the key considerations in drafting and negotiating an LOI is to clearly identify which provisions are binding and which are non-binding.  Oftentimes, an LOI will include express provisions that identify the binding and non-binding provisions as such.  Other times, the binding nature of the terms of an LOI may be less clear. SIGA Technologies v. PharmAthene In SIGA Technologies, two biotech companies negotiated the terms of a license agreement term sheet (the “LATS”).  After negotiating the...

New M&A Proxy Statement Unbundling Guidance

After a decade of inattention, the SEC staff has recently sought to clarify the still-murky proxy statement unbundling rule. First came three C&DIs issued back in January 2014 (see this Doug’s Note). Then just weeks ago, the staff provided further guidance specifically in the context of mergers and acquisitions. But first, what is the unbundling rule? Securities Exchange Act Rule 14a-4(a)(3) requires that: “[t]he form of proxy…[s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters….” (emphasis added) Rule 14a-4(b)(1) contains similar “each separate matter” language regarding the related proxy card. Fundamentally, and as clarified in the 2014 C&DIs, the rule works this way: “Multiple matters that are so ‘inextricably intertwined’ as to effectively constitute a single matter need not be unbundled.” Separate matters are not deemed to be inextricably intertwined merely because they were negotiated as part of a single transaction with a third party. A number of immaterial matters may be bundled with a single material matter. When evaluating materiality, consider whether a matter substantially affects shareholder rights and whether shareholders could reasonably be expected to wish to express separate views on such matters. The new M&A unbundling guidance… The new guidance, in the form of Q&As, addresses unbundling solely in the context of a merger proxy statement. In doing so, it not only builds on the staff’s 2004 guidance on that topic, but also arguably crosses the line into matters previously reserved to state corporate law. It is now the staff’s position that when a merger in which the target’s...

Sealing the Deal with Rep & Warranty Insurance

More and more parties to M&A transactions are utilizing representation and warranty insurance (“R&W insurance”) as a tool to reach agreement.  While R&W insurance has been around for many years, its popularity has soared recently, especially in middle market transactions valued between $20 million and $1 billion.  R&W insurance provides coverage for a breach of a representation or warranty that results in losses or an indemnification claim.  While it is available to both buyers and sellers, it is more often used by buyers. The increasing popularity is due to a number of factors, including the growth of the insurance market, which has developed better pricing for policies, expanded policy terms and features to better mirror traditional indemnification packages and established trust in the market regarding the insurers ability and willingness to administer and pay claims. Structure of R&W Insurance Policies Due to the nature of an R&W insurance policy and the developing insurance market, the terms of each R&W insurance policy are negotiated to suit the insured’s needs.  All policies are “claims-based”, meaning that the breach must occur, and the claim must be filed, during the term of the policy in order to be valid. Scope of a Policy As its name suggests, R&W insurance will only cover breaches of representations and warranties in the transaction agreement.  Generally, it does not provide coverage for breaches under the purchase price adjustment provisions, covenants or any provisions other than the representations and warranties.  A policy will typically cover all “operating” representations and warranties,¹ but the insured can also opt to insure only certain reps and warranties.  Most, if not all, policies...

Traps for the Unwary: A Look at Employees and Benefits in M&A Transactions

Employees drive the success of a company.  In fact, in some industries (technology, for example) talent acquisition can be a primary motivation for a transaction.  From identifying the target’s key employees, to assessing the potential liabilities and obligations associated with the target’s entire workforce, to integration and retention, business combinations give rise to a variety of complex employment and benefit issues that should be carefully addressed by the parties. An initial and fundamental consideration is how to structure the transaction.  In addition to tax, general allocation of liability and other considerations, a transaction’s structure also dictates the specific liabilities and obligations a buyer will assume with respect to employees.  For example, in a stock-based transaction like a merger or stock acquisition, the buyer automatically becomes the employer of the target’s workforce and generally assumes all of the target’s liabilities related to those employees, including compensation and employee benefits.  On the other hand, the buyer in an asset transaction has more flexibility to negotiate the employees it will hire and the liabilities it will assume from the selling company. In analyzing the employee-related consequences of a business combination and conducting due diligence, it is important to consider a multitude of issues, with some of the more challenging areas highlighted below.  Depending on the circumstances, these can be thorny issues that warrant negotiation to reallocate potential risk and liabilities and/or a purchase price adjustment. Benefit Plans For many benefit purposes under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, and therefore also in an M&A scenario, the “controlled group” rules come into play.  Under these...