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Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark PLI Doing Deals March 28, 2007.

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Presentation on theme: "Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark PLI Doing Deals March 28, 2007."— Presentation transcript:

1 Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark PLI Doing Deals March 28, 2007 Nicole E. Clark

2 2 Speaker Profile Nicole E. Clark is a Partner in the Corporate section of Vinson & Elkins and focuses on public and private mergers, acquisitions and divestitures; securities offerings; and corporate governance matters. She can be contacted at or via at

3 3 Preliminary Agreements Confidentiality Agreements (CAs) Standstill Agreements Exclusivity Agreements Letters of Intent (LOIs)

4 4 Preliminary Agreements Practice Tip: Business people may view preliminary agreements as “standard” or “boilerplate.” To help avoid unintended consequences, lawyers should get involved early in the transaction.

5 5 Confidentiality Agreements Basic Elements  Definition of “confidential information”  Obligation to protect the information  Return of information  Disclaimer of obligation to negotiate/consummate  Disclaimer of warranty  Unilateral vs. bilateral  Definition of “representatives”  Term/integration  Access to employees

6 6 Confidentiality Agreements Basic Elements Other possible provisions: Prohibition on soliciting or hiring personnel Most-favored nations clause No clubbing Standstill (if a public company target) Exclusivity

7 7 Definition of Confidential Information Typically, broadly defined to include all information concerning the business and affairs of seller that will be disclosed to the recipient, including materials prepared by the recipient Specific identification of confidential information Exclusions to the definition –Already in possession of recipient –Becomes publicly available (other than through any breach by the recipient of the CA) –Independently developed by recipient –Exception when required by law or court order

8 8 Definition of Confidential Information Sensitive information may include: –Trade secrets Term on confidentiality obligation can thwart required efforts to maintain secrecy Disclosure to one party can have effect vis-à-vis third parties Defer disclosure Buyers should consider having CAs assigned Consult with IP counsel –Privileged documents Disclosure may create risk of waiver Consider discussion among lawyers rather than provision of documents Consider “common interest” language if disclosure necessary –But note that this language may flag the issue for third parties Consult with litigation counsel

9 9 Definition of Confidential Information Disclosures to competitors may create antitrust risks –Pricing or other competitively sensitive information –Potential approaches: Exclude sensitive information from disclosures Identify materials that will not be disclosed Limit disclosure to recipient’s personnel not in a position to violate antitrust laws Defer disclosure until late in the process Avoid mutual exchanges –Be aware that express provision in CA may flag the issue –Consult with antitrust counsel

10 10 Obligation to protect the information Limited purpose –“assist the bidder and its representatives in connection with a possible negotiated transaction” –“possible” in order to avoid implication that there is an agreement in principle –“negotiated” in order to reinforce that the company’s purpose is to facilitate a process which it controls and that it would be a breach for bidder to make a hostile bid (if target is a public company) Agreement not to use the information “in any way detrimental to the Company” –Viewed as broad by recipients

11 11 Obligation to protect the information Enforcement –Acknowledgment that money damages are insufficient –Express inclusion of injunctive relief and specific performance (non-exclusive remedy) –Governing law –Consent to jurisdiction of a specific court

12 12 Return of Information Return or destroy –At bidder’s or seller’s option? Bidder may request to have the right to keep one copy (usually by its outside counsel) Electronic data rooms

13 13 “Representatives” Who is covered? –Private equity bidders may be especially sensitive to the inclusion of “affiliates” in definition Disclosure on a “need to know” basis Bidder may seek to limit obligations for actions of its representatives Execution of acknowledgements “Clubbing” concerns –Definition of representatives may expressly exclude other equity participants; additional provisions may also prohibit clubbing –Definition of representatives may expressly exclude potential lenders unless identified; additional provision may prevent bidders from exclusive use of a debt financing source

14 14 Term/Integration Seller’s form may not include any term provision Bidder will seek to limit (e.g., for 1-2 years) Consider the type of the information disclosed –Trade secrets – specified term can thwart required efforts to maintain secrecy Consider varying survival, if warranted Consider delaying disclosure of the most sensitive information Integration clause in definitive agreement –CA to be modified or superseded

15 15 Non-solicit of Employees Non-solicitation of employees –Generally see 6 months – 2 years –Bidder may want to limit to those introduced through process –Exception for general solicitation or employees laid-off by seller Non-solicitation clauses that extend to customers and suppliers could be a “back-door” non-compete

16 16 Most-favored nations clause Bidder negotiates to receive most preferential terms granted to any other bidder. Seller will want to retain flexibility to respond to bidders depending upon their individual circumstances. –For example, in the public company context, if a bidder already has commenced a tender offer, the company may agree to a CA without a standstill with such bidder and arguably it should not have to agree to waive its standstill with another bidder merely because the other bidder had obtained a most favored nations clause

17 17 Standstill (if a public company target) Agreement by bidder to not pursue an acquisition of the target other than by negotiating with the target’s management and the board for a specified period –Prohibitions on acquisition of target securities –Prohibitions on proxy solicitations –Restrictions on requests for waivers Advantages for target: –Avoid hostile offer –Greater control over auction process –Avoiding public disclosure Advantages for bidder: –Access to non-public information

18 18 Standstill Bidder may seek to limit the standstill so that it will terminate if a third party proposes to acquire the target In two recent cases, bidders who had executed a standstill were precluded from making topping bid Important to note that even if there is not an explicit standstill provision, receipt of material non-public information (for example, projections) and/or limited use clause may restrict bidder from proceeding on a hostile basis

19 19 Exclusivity Agreements Agreement by potential seller to deal exclusively with one potential buyer for a specified period of time Buyer may require before investing a significant amount of time and expense in due diligence and negotiations Shift in leverage –Seller may desire to negotiate for as many material terms as it can upfront, in exchange for exclusivity, when its leverage is greatest Buyer may ask for notification of unsolicited offers

20 20 Letters of Intent Used to outline the material terms of a proposed transaction –Usually signed by both parties (as opposed to a term sheet) –Almost always intended to be non-binding, except for certain limited terms (such as confidentiality, exclusivity, expenses)

21 21 Letters of Intent Advantages to using an LOI –Creates a roadmap –Helps to expose any “deal breakers” –May enhance parties’ commitment/ moral obligation to the deal –Solidifies understanding - helps to avoid “selective memory” –May be useful to buyer in seeking financing –Can help facilitate earlier compliance with regulatory requirements

22 22 Letters of Intent Disadvantages –For a public company it may create an obligation to disclose the proposed transaction before the parties would otherwise like –Risk of unintended consequence of being construed as a binding agreement Pennzoil v. Texaco — $11 billion damage award against Texaco over its tortious interference with Pennzoil’s memorandum of agreement to acquire an interest in Getty Oil –Risk of unintended consequence of having an obligation to negotiate in good faith

23 23 Letters of Intent Courts found obligation to negotiate in good faith when: The parties did not state expressly an intention to be bound or not –Party’s reservation of right of approval to its board of directors did not leave it free to abandon the transaction Language in the LOI –LOI stated that the parties “shall make every reasonable effort to agree upon and have prepared” a contract setting forth the terms and conditions of a merger to be agreed upon Conduct of the parties after executing the LOI –Court noted that oral assurances, reliance and awareness of reliance was substantial enough to establish a triable claim under promissory estoppel doctrine

24 24 Letters of Intent To avoid unintended consequences –Be explicit and precise as to intent to be bound or not Specify provisions that are binding and precise remedy for breach –If further negotiations are contemplated, a court may find a duty to continue to negotiate in good faith To avoid uncertainty, parties may choose to affirm this duty or to expressly reject it –State that each party bears its own expenses whether or not definitive agreement is reached –Specify period for future negotiation

25 Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark PLI Doing Deals March 28, 2007 Nicole E. Clark


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