1. ACQUIRING A BUSINESS IN THE UNITED STATES Corporate and Business Law Aspects Current Trends © 2004, 2008 Constance R. Barnhart

2. 2© 2004, 2008 Contance R. Barnhart Beginning the Process: CULTURAL DIFFERENCES AMERICAN

3. 3© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

4. 4© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

5. 5© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

6. 6© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

7. 7© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

8. 8© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

9. 9© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN

10. 10© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN Have a Nice Day

11. 11© 2004, 2008 Contance R. Barnhart Good Time to Acquire a Business in the United States Dollar low Dollar low Low valuations – time of near-recession Low valuations – time of near-recession Troubled company opportunities Troubled company opportunities VCs divesting & partnering to re-invest VCs divesting & partnering to re-invest Some pick-up in M&A activity Some pick-up in M&A activity

12. 12© 2004, 2008 Contance R. Barnhart Beginning the Process FINDING THE TARGET Beware the Internet Beware the Internet Registered Broker/ Dealer Requirement in U.S. Registered Broker/ Dealer Requirement in U.S. LETTER OF INTENT May Not be Wise – Risk of Binding Effect May Not be Wise – Risk of Binding Effect Hard to Change Terms Already Agreed Hard to Change Terms Already Agreed Its a Legal Process from the Beginning in U.S. Its a Legal Process from the Beginning in U.S.

13. 13© 2004, 2008 Contance R. Barnhart Due Diligence Virtually No Public Information on U.S. Private Companies Virtually No Public Information on U.S. Private Companies No Audited Financials No Audited Financials No Public Disclosure Documents No Public Disclosure Documents Caveat Emptor (Buyer Beware) – Caveat Emptor (Buyer Beware) – Common Law vs. Code Law system Early, Careful & Thorough Due Diligence Means Money Early, Careful & Thorough Due Diligence Means Money

14. 14© 2004, 2008 Contance R. Barnhart Due Diligence: Management & Reputation Public Information – Press Coverage Private Investigators in The Due Diligence Process: Background Checks – Criminal; Civil; Corporate Background Checks – Criminal; Civil; Corporate Litigation Checks Litigation Checks Customer, Supplier and Creditor Checks – Payment History Customer, Supplier and Creditor Checks – Payment History Competitor Intelligence Competitor Intelligence References; Reputation References; Reputation

15. 15© 2004, 2008 Contance R. Barnhart Basic Corporate & Financial Due Diligence See Sample U.S. Due Diligence Checklists See Sample U.S. Due Diligence Checklists Financial Records – U.S. GAAP (or GUAP) Financial Records – U.S. GAAP (or GUAP) When there are No Audited Financials? When there are No Audited Financials? When You Are Buying a Division? Pre or Post Closing Audit, with Adjustments to Purchase Price Pre or Post Closing Audit, with Adjustments to Purchase Price Valuation Opinion – Discounted Cash Flow; Comparable Deals Valuation Opinion – Discounted Cash Flow; Comparable Deals Earn Out Earn Out

16. 16© 2004, 2008 Contance R. Barnhart U.S. Due Diligence – Big Ticket Items Product Liability Claims Product Liability Claims Class Action Litigation Class Action Litigation Securities or Accounting Fraud Securities or Accounting Fraud Environmental Liabilities – Superfund Clean-Up Laws Environmental Liabilities – Superfund Clean-Up Laws Price Fixing or Anti-Trust Issues Price Fixing or Anti-Trust Issues Patent Infringement, Trademark Infringement Claims Patent Infringement, Trademark Infringement Claims Patent Issued or Trademark Registration is No Guarantee Patent Issued or Trademark Registration is No Guarantee Trade Secret Issues Trade Secret Issues Hidden Claims of Past Owners or Past Employers of Inventors Hidden Claims of Past Owners or Past Employers of Inventors

17. 17© 2004, 2008 Contance R. Barnhart Contracts & Securities: Small Print with Big Impact Reps; Liquidated Damages on Breach Reps; Liquidated Damages on Breach Performance Standards; Termination; Evergreen Contracts Performance Standards; Termination; Evergreen Contracts Non-assignment clauses (if transaction involves transfer of assets) Non-assignment clauses (if transaction involves transfer of assets) Change of control (if sale of more than 50% of the equity of the entity) Change of control (if sale of more than 50% of the equity of the entity) Equity warrants Equity warrants Stock rights & Anti-dilution clauses (in stock option, sales agreements) Stock rights & Anti-dilution clauses (in stock option, sales agreements) Securities Review – Paper records & Certificates Securities Review – Paper records & Certificates

18. 18© 2004, 2008 Contance R. Barnhart Gotchas State franchise taxes and qualification fees State franchise taxes and qualification fees State income and sales taxes State income and sales taxes Qualification to do business Qualification to do business Employment taxes Employment taxes Lack of corporate records Lack of corporate records

19. 19© 2004, 2008 Contance R. Barnhart Sarbanes-Oxley Act Issues for the Public Company Acquirer Will the Target Company Take You Out of Compliance? Officer & Director Loans; Consideration Issues Officer & Director Loans; Consideration Issues GAAP Financials GAAP Financials Disclosure Controls and Procedures; Certification Requirements Disclosure Controls and Procedures; Certification Requirements Triggers for Enhanced Review by SEC Triggers for Enhanced Review by SEC Material Financial Restatements Material Financial Restatements Disparities in Price to Earnings Ratio Disparities in Price to Earnings Ratio Significant Stock Price Volatility Significant Stock Price Volatility Auditor Independence; Audit Committee Auditor Independence; Audit Committee Majority of Independent Directors Majority of Independent Directors

20. 20© 2004, 2008 Contance R. Barnhart Structuring the Transaction: Choice of Entity for U.S. Investment The options: The options: C Corporation C Corporation S Corporation S Corporation Limited Liability Company Limited Liability Company The reasons: The reasons: Taxation Taxation Flexibility of governance Flexibility of governance Appeal for future institutional venture investors Appeal for future institutional venture investors Opportunity for future tax-deferred deals Opportunity for future tax-deferred deals

21. 21© 2004, 2008 Contance R. Barnhart C Corporation Pros: Pros: Simple Simple Keeps foreign parent from filing returns or paying tax in U.S. Keeps foreign parent from filing returns or paying tax in U.S. Eligible for future tax-deferred 368 reorgs. Eligible for future tax-deferred 368 reorgs. Stock options easy to implement Stock options easy to implement Fast/inexpensive to create Fast/inexpensive to create Institutional VCs will require these or LLCs Institutional VCs will require these or LLCs Any number and type of shareholders Any number and type of shareholders Multiple classes of stock Multiple classes of stock Cons: Cons: Double tax Double tax

22. 22© 2004, 2008 Contance R. Barnhart S Corporation Pros: Pros: Simple Simple Single-level tax Single-level tax Eligible for future tax-deferred 368 reorgs. Eligible for future tax-deferred 368 reorgs. Stock options easy to implement Stock options easy to implement Fast/inexpensive to create Fast/inexpensive to create Cons: Cons: Only US resident individuals and S corporations may own shares; some trusts Only US resident individuals and S corporations may own shares; some trusts One class of stock (though voting/non-voting permitted) One class of stock (though voting/non-voting permitted) Limit on the number of investors Limit on the number of investors

23. 23© 2004, 2008 Contance R. Barnhart Limited Liability Company Pros: Pros: Flexible Flexible Pass-through Tax Treatment; Single level tax Pass-through Tax Treatment; Single level tax Good U.S. vehicle for foreign parties with no U.S. operations or income in ventures outside of U.S. Good U.S. vehicle for foreign parties with no U.S. operations or income in ventures outside of U.S. Any number and type of members (owners) permitted Any number and type of members (owners) permitted Multiple classes of ownership units Multiple classes of ownership units Cons: Cons: Subjects foreign parent to U.S. tax on U.S. income & filing tax return in U.S. Subjects foreign parent to U.S. tax on U.S. income & filing tax return in U.S. Complex Operating Agreements (more like partnership) Complex Operating Agreements (more like partnership) Slow, expensive Slow, expensive Newer form of entity; Case law/ rights not as well established Newer form of entity; Case law/ rights not as well established Awkward for equity option plans Awkward for equity option plans Many VCs cannot be members (UBTI – Unrelated Business Taxable Income) Many VCs cannot be members (UBTI – Unrelated Business Taxable Income)

24. 24© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 1.STOCK PURCHASE, ASSET PURCHASE OR MERGER Stock purchase is most prevalent: Stock purchase is most prevalent: May avoid third party consents triggered by asset sales May avoid third party consents triggered by asset sales Long term capital gains for Seller Long term capital gains for Seller Novations of government contracts not required for Buyer Novations of government contracts not required for Buyer Asset purchase where division being sold or liabilities difficult to assess Asset purchase where division being sold or liabilities difficult to assess Merger may be used where target is publicly held or where less than all stockholders are willing participants Merger may be used where target is publicly held or where less than all stockholders are willing participants Tax Considerations Tax Considerations

25. 25© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 2. FORMS AND STRUCTURE OF CONSIDERATION Stock in Publicly Traded Buyer Stock in Publicly Traded Buyer Likely still restricted stock in U.S. Likely still restricted stock in U.S. But worth more than U.S. Stock if U.S. Seller can trade outside of U.S. under Reg S But worth more than U.S. Stock if U.S. Seller can trade outside of U.S. under Reg S Stock in Non-Public Buyer Stock in Non-Public Buyer Valuation issues Valuation issues Stockholders Agreement restrictions Stockholders Agreement restrictions Pledge as Security for Sellers Reps/ Indemnities Pledge as Security for Sellers Reps/ Indemnities

26. 26© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms FORMS AND STRUCTURE OF CONSIDERATION, Cont : Cash – Installments; Adjustments Cash – Installments; Adjustments Subordinated Notes of Buyer -- LBO Subordinated Notes of Buyer -- LBO Collateral – subordinated lien on assets or stock of Target Collateral – subordinated lien on assets or stock of Target Principal issues are repayment terms, interest and terms of subordination agreement Principal issues are repayment terms, interest and terms of subordination agreement Subordination issues include how much senior or mezzanine debt is permitted, what remedies are available upon default of senior debt and when may payments be made Subordination issues include how much senior or mezzanine debt is permitted, what remedies are available upon default of senior debt and when may payments be made Mandatory prepayment upon sale, recapitalization or IPO often required Mandatory prepayment upon sale, recapitalization or IPO often required

27. 27© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 3. PAYMENT STRUCTURE & SECURITY: Holdbacks and Escrows Holdbacks and Escrows Closing Balance Sheet & Post-Closing Adjustments Closing Balance Sheet & Post-Closing Adjustments Earn-Outs – Contingent Deferred Payments Earn-Outs – Contingent Deferred Payments Pledged Buyer Stock Pledged Buyer Stock

28. 28© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 4. REPRESENTATIONS AND WARRANTIES Common Law vs. Code Law System Common Law vs. Code Law System Assets -- A/R Collection; Real Estate; IP Assets -- A/R Collection; Real Estate; IP Liabilities – Prod. Liability; Environmental; Accounting Fraud; Employee Matters; Tax Responsibility; Litigation/ Claims: Liabilities – Prod. Liability; Environmental; Accounting Fraud; Employee Matters; Tax Responsibility; Litigation/ Claims: (>Contingent Fees >Class Actions >Each Party pays Own Atty Fees) (>Contingent Fees >Class Actions >Each Party pays Own Atty Fees) Operations – Financials; Inter-company issues; Conduct pending Closing Operations – Financials; Inter-company issues; Conduct pending Closing Due Diligence Out Due Diligence Out Materiality and knowledge qualifiers – allocation of risks Materiality and knowledge qualifiers – allocation of risks Definition of knowledge and knowledgeable employees Definition of knowledge and knowledgeable employees

29. 29© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 5.SURVIVAL OF REPRESENTATIONS AND WARRANTIES General – 1 to 2 years General – 1 to 2 years Capitalization, authority, title, brokers – indefinite Capitalization, authority, title, brokers – indefinite Tax, ERISA, environmental – 30-60 days past statute of limitations Tax, ERISA, environmental – 30-60 days past statute of limitations Government contracts – 3-5 years, statute of limitations or general Government contracts – 3-5 years, statute of limitations or general Pre-closing covenants – indefinite or same as general Pre-closing covenants – indefinite or same as general Post-closing covenants – indefinite Post-closing covenants – indefinite

30. 30© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 6. INDEMNIFICATION Sellers – joint and several Sellers – joint and several Cap – percent of consideration varies (10% to 50%) Cap – percent of consideration varies (10% to 50%) Basket – vs. Extent of materiality qualifiers in reps. Basket – vs. Extent of materiality qualifiers in reps. Exclusive remedy – except for fraud Exclusive remedy – except for fraud Potential exclusions from cap and/or basket: breach of covenants, fraud, willful misconduct, tax, ERISA, government contracts, ongoing litigation/investigation/claims Potential exclusions from cap and/or basket: breach of covenants, fraud, willful misconduct, tax, ERISA, government contracts, ongoing litigation/investigation/claims Special indemnities outside of cap or basket for known items that Buyer will not assume Special indemnities outside of cap or basket for known items that Buyer will not assume Rep. & Warranty Insurance Rep. & Warranty Insurance

31. 31© 2004, 2008 Contance R. Barnhart Trends in Deal Structure and Terms 7. EMPLOYEE/ SELLER RETENTION ISSUES EMPLOYEE RETENTION EMPLOYEE RETENTION Retention agreements – terms, responsible party Retention agreements – terms, responsible party Employment agreements – condition to closing Employment agreements – condition to closing Seller Earn Out Seller Earn Out NON-COMPETE AGREEMENTS OF SELLERS NON-COMPETE AGREEMENTS OF SELLERS Term – 2 to 5 years or longer Term – 2 to 5 years or longer Scope – Sellers business or certain customers of Target Scope – Sellers business or certain customers of Target Exclusions – academia, unrelated consulting, government position, certain investments in funds Exclusions – academia, unrelated consulting, government position, certain investments in funds Non-solicitation of Employees Non-solicitation of Employees Non-disparagement Non-disparagement Non-disclosure of Targets proprietary information Non-disclosure of Targets proprietary information

32. 32© 2004, 2008 Contance R. Barnhart Special Issues in Troubled Company Acquisitions Fraudulent Transfer Fraudulent Transfer Bulk Transfer Laws Bulk Transfer Laws Successor Liability Successor Liability Right to Reject or Assume Contracts Right to Reject or Assume Contracts Pre-Bankruptcy Acquisition Strategies Pre-Bankruptcy Acquisition Strategies Prepackaged Bankruptcies Prepackaged Bankruptcies

33. 33© 2004, 2008 Contance R. Barnhart Special U.S. Regulatory Issues for the Foreign Buyer Hart-Scott-Rodino Act – Anti-Trust Pre-Merger Notification Hart-Scott-Rodino Act – Anti-Trust Pre-Merger Notification U.S. Real Property Holding Corporation – Withholding Tax U.S. Real Property Holding Corporation – Withholding Tax SEC Requirements SEC Requirements Exon-Florio Amendment Exon-Florio Amendment Regulated Industries (Communication; Shipping; Aviation; Defense; Energy & Natural Resources; State Regulations) Regulated Industries (Communication; Shipping; Aviation; Defense; Energy & Natural Resources; State Regulations) Reporting Requirements Reporting Requirements

34. 34© 2004, 2008 Contance R. Barnhart 7 Keys to a Successful Acquisition in the United States 1. Prepare -- Education on the U.S. Environment and Advance Consultation with Qualified U.S. Acquisition Experts 2.Seize Opportunities – Act when valuations are low 3.Due Diligence -- Do Your Thorough Homework on the Target 4.Manage Expectations – Consult with your advisors to determine what terms are realistic and customary

35. 35© 2004, 2008 Contance R. Barnhart 7 Keys to a Successful Acquisition in the United States 5. Teamwork among acquisition team members in Buyers country and U.S. --Buyer, accountants, investment bankers, legal counsel 6.Use Experienced Advisors with a Creative Win/Win approach to Negotiations -- Beware of the all too common Adversarial U.S. Bulldog 7.Understand and Manage Cultural Differences (and work with Advisors who understand and can help with this) –- Clear Communication

36. 36© 2004, 2008 Contance R. Barnhart CULTURAL DIFFERENCES AMERICAN Have a Nice Day