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Choosing the Appropriate Standard of Review with Mergers Between a Controlling Stockholder and its Subsidiary: The Business Judgement Rule v. Entire Fairness Standard
Reliance Disclaimers in M&A Agreements
Buying or selling a closely held business (“M&A), including the purchase of a division or a subsidiary, can be structured as (i) a statutory combination such as a statutory merger or share exchange, (ii) a negotiated purchase of outstanding stock from existing shareholders or (iii) a purchase of assets from the business.1 An M&A transaction typically revolves around an agreement between the buyer and the selling entity, and sometimes its owners, setting forth the terms of the deal, which is herein referred to as the “Agreement” whether it takes the form of a merger agreement, stock purchase agreement or asset purchase agreement. An M&A Agreement typically includes contractual representations and warranties as to the assets and liabilities of the business to be acquired, conditions to the buyer’s obligations to close the transaction contemplated thereby, the obligations of the seller and its owners to indemnify the buyer for breaches of its representations and covenants therein (and any contractual limitations on the amount that buyer can recover for such breaches), and that the Agreement represents the entire agreement of the parties with respect to the transaction. After the transaction is closed, the buyer may determine that there were breaches of seller’s representations and covenants, and that buyer’s losses could exceed the amount that buyer could recover under the express indemnification provisions in the Agreement. Under these circumstances, the buyer might claim that is was defrauded by the seller, that its damages for its fraud claim were not capped by the Agreement, and that it is entitled to rescind the transactions and recover the amount that it paid for the business. Whether the buyer is entitled to recover the amount it seeks depends on the wording of the Agreement and the law governing its rights under the Agreement.
What to Do When Someone Wants to Buy the Business
Imagine that your long-time client calls you and gives you a piece of exciting news – he has decided to sell his business, and has an interested buyer. You have watched the business grow, through the years assisting with capital raising, contract drafting, and litigation. Although the business’s cash flow has provided much over the years – it has put food on your client’s table, sent his children through college, and provided employment for a number of people – most of the earnings of the business have been plowed right back into it, fueling growth in the good times and keeping heads above water in the tough times. Now the time has come for your client to monetize the value of his life’s work. He, and perhaps you, have visions of drawing up a simple agreement, receiving a handsome check, and riding off into the sunset. The reality is that a long and potentially hazardous journey is just beginning. What do you do now?
Acquisition Structure Decision Tree
Buying or selling a business in Texas, including the purchase of a division or a subsidiary, revolves around a purchase agreement between the buyer and the selling entity and sometimes its owners. Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller. When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.
Choice of Entity and Acquisition Structure Decision Tree
These are the presentation slides.
Private Target Mergers & Acquistion Deal Study Points
These are the presentation slides.
They're Real and They're Spectacular: The 2009 Private M&A Target Deal Points
Copy of an article from the M&A Lawyer magazine.
Merger & Acquisitions
Buying or selling a business in Texas, including the purchase of a division or a subsidiary, revolves around a purchase agreement between the buyer and the selling entity and sometimes its owners. Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller. When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.
Raising Capital and Selling a Company During and After the Great Recession
Approximately three years ago the American economy entered into the worst economic downturn since the Great Depression. Only now are we beginning to get a feel for the magnitude of this most recent recession, sometimes referred to by economists and commentators as “the Great Recession.” Traditionally, economic downturns have had the greatest impact on those who are most susceptible to economic distress: the economically disenfranchised. However, the Great Recession, though affecting almost everyone, has been most disruptive to those who were previously the most protected: the wealthy, the privileged, and the gainfully employed.1 Corporations have also felt the impact of the Great Recession. The Federal Reserve’s statistics show that 86% of all industries have cut back production since November of 2007, the most widespread reduction in the 42 years the Fed has tracked this figure. Likewise, recent economic events have had a significant adverse impact on the ability of companies, particularly smaller and emerging growth companies, to raise capital. The Great Recession has also resulted in a significant decline in activity in mergers and acquisitions (“M&A”). From 2007 until 2008, M&A activity declined by 21%. From 2008 until 2009, M&A activity declined an additional 53%.2 There was a brief uptick in global M&A activity toward the end of 2009, but unfortunately the gains were short lived as M&A activity began to experience a “double-dip” decline at the beginning of 2010.
Acquisitions of Entities in Texas
Selected asset purchase agreement provisions are provided.
Corporation, Partnership (General, Limited and LLP) and Limited Liability Company Acquisitions Under Texas Business Organizations Code
The Texas Business Organizations Code (the "TBOC" or the "Code") is a substantive codification of the prior Texas statutes governing non-profit and for-profit, private-sector entities, which, for the most part were repealed effective as of January 1, 2010. These statutes consisted of the Texas Business Corporation Act ("TBCA"), Texas Miscellaneous Corporation Laws Act ("TMCLA"), Texas Limited Liability Company Act ("TLLCA"), Texas Revised Limited Partnership Act ("TRLPA"), Texas Revised Partnership Act ("TRPA"), Texas Non-Profit Corporation Act ("TNPCA"), Texas Real Estate Investment Trust Act ("TREITA"), Texas Uniform Unincorporated Nonprofit Associations Act ("TUUNAA"), Texas Professional Corporation Act ("TPCA"), Texas Professional Associations Act ("TPAA"), Cooperative Associations Act ("CAA") and other existing provisions of Texas statutes governing private entities.
Shareholder Agreements, Buy/Sell Agreements and Voting Trusts
This outline analyzes the use of shareholder agreements and voting trusts in connection with a startup or venture capital funded company. Shareholder agreements and voting trusts are contractual control mechanisms that are designed to address various issues, including: (i) restrictions on the transfer of equity ownership, (ii) rights of first refusal and (iii) buy-sell provisions.
Getting Your Client Ready to Sell
Selling a business is not for the faint at heart. Most sophisticated buyers will leave no stone unturned in examining a potential purchase target. This is particularly true for publicly traded companies, which have expanded due diligence duties imposed on them by the Sarbanes-Oxley Act of 2002. To make matters worse, most companies are not operated with a view toward being acquired. This combination can often make for an arduous, and sometimes contentious, review process. Troublesome issues ranging from the identity of the business owner to the conduct of day-to-day operations can, if not properly addressed, cause a transaction to fail. The wise attorney will anticipate these issues and will advise his or her client on what to expect throughout the process.
Sale of a Business
These are the presentation slides.
Selling a Business: Strategic and Financial Considerations
While the majority of this paper deals with principals that are not dependent upon the current economic conditions, it would be imprudent to ignore the current state of the mergers and acquisitions (M&A) market. Mergers and acquisitions activity has rebound in the second half of 2010. While some economic uncertainty still persists, the economy has expanded and the lending environment has improved. In addition, strategic buyers have returned to the market and private equity firms need to deploy uninvested capital. M&A activity increased throughout the first ten years of 2000, reaching a peak in value of $1,369 billion (2006). Aggregate value declined each subsequent year until 2010 which showed a slight uptick to $829 billion in value, which was 60% of the 2006 high (See Figure 1). The decline from 2006 to 2010 resulted from the credit crisis, declining home values, lack of confidence in the financial sectors, the war on terrorism.
Section Newsletter Summer 2015
This issue includes articles on "Trap for Nonprofit Corporations: Using Single Member LLCs" by Darren Moore and Frank Sommerville; "Form of Nonprofit Corporation Governing Documents Available to Members" by Elizabeth Miller and Frank Sommerville; "Delaware Judge Fines Dole Food Executives $148 Million for Merger Fraud" by Byron Egan; and "Common Qualifications to a Remedies Opinion in U.S. Commercial Loan Transactions" by Gail Merel and Steve Tarry.
Section Newsletter Summer 2015
This issue includes articles on "Trap for Nonprofit Corporations: Using Single Member LLCs" by Darren Moore and Frank Sommerville; "Form of Nonprofit Corporation Governing Documents Available to Members" by Elizabeth Miller and Frank Sommerville; "Delaware Judge Fines Dole Food Executives $148 Million for Merger Fraud" by Byron Egan; and "Common Qualifications to a Remedies Opinion in U.S. Commercial Loan Transactions" by Gail Merel and Steve Tarry.
Diverse Mergers: How to Divide an Entity into Two or More Entities Under a Merger Authorized by the Texas Business Organizations Code
The common conception of a merger is the combination of two entities into one surviving entity. However, the Texas Business Organizations Code (the “TBOC”) provides that through the use of the merger provisions of the code, a Texas domestic entity (an organization formed under or the internal affairs of which are governed by the TBOC ) may be divided into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or noncode organizations. This division through use of the merger statutes is sometimes called a divisive merger or a divisional merger. These provisions remain unique to Texas, although Pennsylvania provides for a statutory division but does not deal with division in its merger statutes. Through an illustrative, fictitious case study, this paper will consider the possibilities presented by the Texas divisional merger provisions as a tool to accomplish client goals and will provide a checklist of steps required to accomplish a divisional merger of a Texas limited liability company or limited partnership (including presenting a form plan of merger). This paper will not examine the federal income tax implications of a divisional merger.
Fiduciary Duties of Directors in M&A Transactions
There are several landmark cases which define the duties of directors in DE and TX companies, including the duties of obedience, loyalty and care. Within the last five years, there have been a number of cases providing additional color.
Divisive Mergers: How to Divide an Entity into Two or More Entities Under a Merger Authorized by the Texas Business Organizations Code
The common conception of a merger is the combination of two entities into one surviving entity. However, the Texas Business Organizations Code (the “TBOC”) provides that through the use of the merger provisions of the code, a Texas domestic entity (an organization formed under or the internal affairs of which are governed by the TBOC) may be divided into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or noncode organizations. This division through use of the merger statutes is sometimes called a divisive merger or a divisional merger. These provisions remain unique to Texas, although Pennsylvania provides for a statutory division but does not deal with division in its merger statutes. Through an illustrative, fictitious case study, this paper will consider the possibilities presented by the Texas divisional merger provisions as a tool to accomplish client goals and will provide a checklist of steps required to accomplish a divisional merger of a Texas limited liability company or limited partnership (including presenting a form plan of merger). This paper will not examine the federal income tax implications of a divisional merger.
Best Practices for Performing and Supervising M&A Due Diligence
The title of this article seems a bit presumptuous given that “best practices” are always subjective and somewhat in the eye of the beholder. Nevertheless, the author, with nearly two decades of buy-side M&A experience, will attempt to impart some nuggets of wisdom and many practical tips for managing the M&A due diligence process. Managing such a process can encompass many steps and can be compressed into a few weeks or stretch out over several months. The process may involve many people from different departments within the acquirer company as well as outsourced expert advisors making contact with many people from different departments within the target company as well as the target company’s outsourced expert advisors. As such, the due diligence process can generate thousands of individual communications and loads of new data. Organization is the key to successfully navigating such a process. Lawyers are uniquely positioned to oversee and manage the process. With our ability to see across multiple domains, focus on the salient issues and manage competing deadlines, lawyers bring an important skillset to the M&A team. This article will attempt to provide lawyers with a roadmap and practical ideas for managing the M&A due diligence efforts of an integrated team.
Acquisitions of Professional Firms
Physicians, lawyers, accountants, architects, veterinarians, real estate agents and other professionals licensed to provide services within their profession often form entities to own and operate their professional practices. The Texas Business Organizations Code (the “TBOC”), Tex. Bus. Orgs. Code Ann. § 1.001 et seq. (West 2012), the Texas statute governs the formation and management of business entities in Texas, recognizes and specifically addresses several types of entities used for professional practices including general partnerships (TBOC Title 4), limited liability partnerships (TBOC Sections 152.801 - 152.805), professional associations (TBOC Title 7 generally and TBOC Chapter 302 specifically), professional corporations (TBOC Title 7 generally and TBOC Chapter 303 specifically) and professional limited liability companies (TBOC Title 7 generally and TBOC Chapter 304 specifically). When a professional or group of professionals desire to sell his, her or their practice, the sale may be structured as sale of the assets of the business or a sale of the stock or ownership interests in the business entity. In many respects the purchase and sale of a professional firm is the same as the purchase and sale of any business. The steps of the transaction will be similar and familiar for a lawyer experienced in handling acquisition transactions of other types of business: a) preparation and negotiation of a letter of intent or term sheet; b) preparation and negotiation of the purchase agreement; c) assistance with the due diligence review; and d) preparation and negotiation of closing documents. However, there are a few notable differences involved when the target business is professional firm that deserve special consideration. This paper will focus on some of those differences and considerations.
Acquisition of Accounting Firms
These are the presentation slides.
2009 Private Target Mergers & Acquisitions Deal Point Study
This Study analyzes publicly available acquisition agreements for transactions completed in 2008 that involved private targets being acquired by public companies. The previous studies published in 2007 and 2006 analyzed such agreements for transactions completed in 2006 and 2004, respectively.
Positioning the Family Business to Remain in the Family or Ready to Sell to a Third Party
This is an outline of topics in the sale of businesses.