1. Drafting Ancillary Documents Nancy A. Norman 112 E. Pecan Street, Suite 2400 San Antonio, Texas 78205 Main: 210.978.7700 Fax: 210.978.7790 nnorman@jw.com August 13, 2008 Buying and Selling a Business in Uncertain Times

2. Drafting Ancillary Documents What are we doing and why is it important? –Document preparation is a central part of mergers and acquisitions. –There is usually a lot at stake. –This is a very human experience. –They are part of the process of the purchase and sales of businesses, known as mergers and acquisitions. –Has the potential to have a significant effect on the participants’ lives.

3. If the Asset Purchase Agreement or the Definitive Agreement is the central document, then the ancillary documents are all of the other documents. Some are prepared and signed in advance of the Definitive Agreement. Some are prepared at the same time as the Definitive Agreement and are attached as exhibits to the Definitive Agreement. Others are prepared and signed at the Closing, which usually occurs after the Definitive Agreement is signed. What are the Ancillary Documents?

4. The Ancillary Documents that we will cover today are: –Title Documents –Confidentiality Agreement –Letter of Intent –Promissory Note –Pledge and Security Agreements –Escrow Agreement –Non Compete Agreement –Employment Agreement What are the Ancillary Documents? (Continued)

5. Usually an agreement to do something in the future. –Example: To buy and sell assets at a future Closing Date. It might, in fact, terminate at Closing. –If so, all of its provisions would flow into the Ancillary Documents signed at Closing which would carry out the terms of the Purchase Agreement. –And in that case, only the Ancillary Documents would continue to operate. –Usually, however, the Purchase Agreement will continue for an agreed-upon period during which the representations and warranties made by the Seller as of Closing are required to be true and correct. Purchase Agreement – Overview

6. Also, sometimes the Buyer or the Seller will want all of the Ancillary Documents to be agreed upon before the Buyer or Seller will sign the Purchase Agreement. –In that case, the forms of the various Ancillary Documents will be exhibits to the Purchase Agreement. Purchase Agreement – Overview (Continued)

7. The American Bar Association (ABA) has developed an excellent Model Asset Purchase Agreement with commentary. It includes exhibits, ancillary documents, and appendices with example forms for the ancillary documents. To obtain these documents, contact: American Bar Association 321 North Clark Street Chicago, IL 60654-7598 312.988.5000 Due to copyright laws, it was not possible to include copies of the forms, but the article in the handout materials draws heavily from the ABA forms. (“Drafting Asset Purchase Agreements and Ancillary Documents” by Byron F. Egan of Jackson Walker L.L.P.) Recommendation

8. “Ancilla” is Latin for a female servant. It is derived from the Latin word, “Ancula”, a goddess who ministers to other, more important gods. “An” is a variation of “ambi,” meaning “around” and “culus” means to circulate, like a wheel. According to the Webster’s dictionary, current definitions of “ancillary” include subordinate, subsidiary, auxiliary and related. History and Use of the Word

9. It is clearly not true that all of these documents are subordinate to the Definitive Agreement. In fact, many of these documents are independent and will survive after the Closing longer than the Asset Purchase Agreement. History and Use of the Word (Continued)

10. Usually protects the Seller. Is usually the first document signed. If both Buyer and Seller will disclose information to each other, then it is appropriate for both sides to sign confidentiality agreements. It imposes an obligation on the Buyer to return or destroy confidential information received. It usually contains a disclaimer of any obligation on the Buyer to negotiate or consummate an acquisition. If the Asset Purchase Agreement contains an “integrating” clause to the effect that prior documents are terminated, then confidentiality provisions should be added to the Asset Purchase Agreement. Confidentiality Agreement

11. Entered into between a Buyer and a Seller as a result of the successful completion of the first phase of negotiations. It clarifies the thinking of the parties and sets the stage to move forward to the Definitive Agreement. It is often the basis for the drafting by legal counsel of the Definitive Agreement. It sets forth clearly the basic terms of the agreement between the parties Letter of Intent

12. The letter of intent may contain a “no shop” provision – to prevent the Seller from negotiating with another party while a Definitive Agreement is being prepared. If a Letter of Intent is not entered into, a Buyer could request a stand alone “no shop” agreement. Letter of Intent (Continued)

13. Often, a Letter of Intent is binding as to certain provisions and non- binding as to other provisions. The binding provisions would focus on the process to be followed by the parties in negotiating the deal. access for the Buyer to conduct its acquisition review no shop restrictions break-up fees non-disclosure obligations procedures for public announcements payment of expenses termination provisions Letter of Intent (Continued)

14. Non-binding provisions: deal points, such as a description of the proposed transaction the purchase price the key ancillary agreements important conditions at closing Letter of Intent (Continued)

15. Title Documents - documents by which title to the property is transferred from the Seller to the Buyer. Bill of Sale – In an asset sale, the assets are transferred from the Seller to the Buyer by a Bill of Sale. –May also be a “Bill of Sale and Assignment of Contract Rights”, which would include an assignment of contract rights. Title Documents

16. Assignment and Assumption Agreements –a separate document by which contractual obligations are assigned by Seller and assumed by Buyer. –May also assign non-contractual assets with associated liabilities, such as warranties. Title Documents (Continued)

17. Assignment and Assumption of Lease –there are a number of reasons to use a separate assignment document for each lease. 1.Where the lease requires the landlord’s consent to the assignment, it is customary for Buyer to assume the obligation of payment in a document that the landlord signs. 2.If the lease is to be filed in the real property records of the county, it is preferable if the assignment pertains to one lease 3.Seller may wish to request a novation so that Seller is dropped as a party and is not obligated for post-closing obligations under the Lease. Title Documents (Continued)

18. Assignment of Copyrights, Assignment of Patents, Assignment of Service Marks, and Assignment of Trademarks Normally, Buyer’s counsel will require separate assignments for several reasons: 1.To have a separate document that may be filed with the records of the U.S. Patent and Trademark Office or with the U.S. Copyright Office. 2.The assignment sets forth in one convenient location the information that will be required in the document cover sheets that will be filed with the U.S. Patent and Trademark Office and the Copyright Office. Title Documents (Continued)

19. Sets out the terms of payment of the consideration that is to be paid in the future. Will include the interest rate, the amortization schedule, the manner of payment, and events of default. The Buyer will prefer that the promissory note given by the Buyer to the Seller is non-negotiable. Promissory Notes

20. Other key issues: –whether the promissory note will be secured –whether there will be a guarantor –the priority of the Buyer’s obligations relative to the Buyer’s other obligations Promissory Notes

21. The question of whether there will be security for the promissory note depends on the credit-worthiness of the Buyer, and the availability of unencumbered assets. Collateral might include a pledge by the Buyer of certain of the assets acquired in the transaction, unless they are pledged elsewhere. If the Promissory Note is secured, similar to a bank credit agreement, the Seller may seek covenants on the assets securing the Note and on the conduct of Buyer’s business. Pledge and Security Agreements

22. For example, the Seller might require that until the Note is paid, the Buyer will maintain the assets in a certain condition and insure the assets at replacement cost. Or, the Seller might seek covenants limiting the Buyer’s ability to take various actions outside of the ordinary course of business until the Note is paid. Pledge and Security Agreements (Continued)

23. The escrow is negotiated. Gives Buyer a source of funds to make claims against for breach of representations and warranties that become known after Closing. Sets forth the terms of the holding of the funds by the escrow holder. Customarily set forth in the Asset Purchase Agreement as a part of the indemnification provisions. Escrow Agreement

24. If the escrow is with a bank or financial institution, they may have their own form of escrow agreement. Escrowed funds are held for a defined period, for example, for 1 year after closing. Please be aware that, typically, institutions that serve as an escrow holder do not mediate disputes between Buyer and Seller. –It will be advisable for the Asset Purchase Agreement to designate a procedure for resolution of disagreements between the parties. Escrow Agreement (Continued)

25. The Buyer should request non-competition agreements from the Seller and its principals. It prevents the Seller from going out after the Closing and competing against the very business he has just sold to Seller. In Texas, it is much easier to enforce a non-competition agreement against a Seller in the context of a sale of a business, as contrasted with, for example, a departing employee. “Non-Competition, Non-Disclosure and Non-Solicitation Agreement.” Non-Competition Agreement

26. Customarily, the covenant not to compete is limited to a period after Closing, and to a certain territory. –Covenants will be enforced only to the extent necessary to protect the interests of the Buyer and may be narrowed by judicial ruling. Non-Competition Agreements are important, and they can be the subject of dispute after Closing, and then litigation. Non-Competition Agreement (Continued)

27. To continue the employment of one or more of the shareholders or key executives of Seller. –This discussion will address the terms of that type of Employment Agreement and not address a full consideration of employee issues. The Employment Agreement may cover the capacity in which the shareholder or executive is being hired, his title, his duties, and the person or body to whom he will report. Employment Agreement

28. Will the shareholder work exclusively for the Buyer or is he free to pursue other professional interests outside his employment with the Buyer? Compensation under the Employment Agreement may include a base salary, discretionary bonuses, fringe benefits and participation in employee benefit plans and insurance policies. Termination – The Buyer will generally want flexibility in being able to terminate the shareholder, including a wide latitude in the “for cause” definition. On the other hand, the shareholder will want to limit the Buyer’s right to terminate the Agreement for cause, including, for example, the right to have an opportunity to cure any breach of the Agreement. Employment Agreement (Continued)

29. Change of Control Provision or “Golden Parachutes” –The shareholder may wish to negotiate a provision that permits him to terminate the Employment Agreement in the event of a change of control of the Buyer and to receive compensation for termination in such circumstances. –The Buyer may wish to encourage top personnel to join the company in this manner, but these burdens may also make the company less attractive to potential acquirers. Employment Agreement (Continued)

30. Thank you for allowing me to speak to you about one important part of the exciting world of mergers and acquisitions.