Transcript McCormick & Company, Inc.

Hogan & Hartson in partnership with the
Association of Corporate Counsel Europe
Successful Dealmaking in Today’s
Challenging Environment:
What you need to know
Tuesday, April 13, 2010
© Hogan & Hartson L.L.P. All rights reserved.
Your speaker panel
Chair
Marten Bezemer
Associate General Counsel EMEA
Plantronics B.V.
Hogan & Hartson speakers
Sarah Atkinson
Dirk Besse
Peter Kohl
Isabelle MacElhone
Partner, London
[email protected]
+44.20.7367.0280
Partner, Munich/Berlin
[email protected]
+49.89.205.08.8839
Partner, London
[email protected]
+44.20.7367.0253
Partner, Paris
[email protected]
+33.1.55.73.23.80
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2
Introduction
Economic Downturn
MAC clauses
Break fees
Market Volatility
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Earn outs
3
MAC clauses
•
•
What is a MAC clause?
–
mechanism for allocating risk between seller and buyer
–
allows buyer to withdraw from a transaction in the event of a MAC between
signing/closing
–
heavily negotiated
–
used in public and private M&A transactions
What form will a MAC clause take?
–
closing condition
–
warranty/termination right for breach
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4
MAC definition
•
Private company acquisition
Material Adverse Change means any change, event or circumstance
which individually or in the aggregate [has resulted][would reasonably be
expected to][could] result in any change or effect that is materially adverse
to the business, operations, assets, position (financial, trading or
otherwise), profits [or prospects] of the [Company][Group, taken as a whole]
[or any event or circumstance that may result in such a material adverse
change] occurring at any time prior to Completion, [excluding, in any such
case, any change, event or circumstance resulting from:
(a)
any change in stock or other financial markets, interest rates, exchange rates, commodity
prices or other general economic conditions;
(b)
any change in conditions generally affecting the [industry];
(c)
any decrease in the value of the [Company][Group taken as a whole] of less than [five]%;
(d)
any change in laws, regulations or accounting practices;
(e)
any matter disclosed in the Disclosure Letter [or the Agreed Form Documents]; and
(f)
any matter effected pursuant to and in accordance with the sale and purchase of the Shares
[including the change in control of the Company resulting from the sale and purchase of the
Shares]
except to the extent that the matters in paragraphs (a) to (c) have an impact
on [the Company][Group], which is disproportionate to the effect on other
[similar] companies operating in the [industry];]
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5
MAC definition (cont’d)
•
Public company acquisition (Hostile Bid)
Since [end of offeree’s last financial year or date on which report and accounts
were prepared] there has been no material adverse change or deterioration in
the business, assets, financial or trading position or profits or prospects of any
member of the [wider offeree group] except as:
(a) disclosed in the offeree’s annual report and accounts for the year then
ended; or
(b) as publicly announced by the offeree prior to [ ].
•
Public company acquisition (Recommended Bid)
Since [end of offeree’s last financial year or date on which report and accounts
were prepared] there has been no material adverse change or deterioration in
the business, assets, financial or trading position or profits [or prospects] of
any member of the [wider offeree group] [which in any case is material in the
context of the offeree group taken as a whole] except as:
(a) disclosed in the offeree’s annual report and accounts for the year then
ended;
(b) as publicly announced by the offeree prior to [ ]; or
(c) otherwise disclosed in writing to the offeror by or on behalf of the offeree
prior to [ ].
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6
MAC definition (cont’d)
•
•
Key elements of MAC definition
–
potential effects of events
–
object of the deterioration
–
definition of the target
MAC exceptions
–
reduction of customers or decline in business
–
delay or cancellation of orders for services or products
–
adverse effect resulting in seasonal reduction in revenues
–
effect of announcement of transaction
–
action required to be taken under the acquisition agreement or at the request
of the buyer
–
acts of terrorism or war or weather or other material natural disasters
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Hexion/Huntsman MAC clause
•
Any occurrence, condition, change, event or effect that is
materially adverse to the financial condition, business, or results of
operations of the Company and its Subsidiaries, taken as a whole;
provided however, that in no event shall any of the following
constitute a Company Material Adverse Effect: (A) any occurrence,
condition, change, event or effect resulting from or relating to
changes in general economic or financial market conditions,
except in the event, and only to the extent, that such occurrence,
condition, change, event or effect has had a disproportionate
effect on the Company and its Subsidiaries, taken as a whole, as
compared to other Persons engaged in the chemical industry; (B)
any occurrence, condition, change, event or effect that affects the
chemical industry generally (including changes in commodity
prices, general market prices and regulatory changes affecting the
chemical industry generally) except in the event, and only to the
extent, that such occurrence, condition, change, event or effect
has had a disproportionate effect on the Company and its
Subsidiaries, taken as a whole, as compared to other Persons
engaged in the chemical industry …
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8
Lessons from Hexion/Huntsman
•
The party asserting an MAC (usually the buyer) bears the burden
of proof
•
Carve-outs are only relevant if the initial MAC definition is met
•
MAC is not measured by performance versus projections, and will
be affected by representations and disclaimers
•
Absent a clear contractual provision, an effect must be
“durationally significant” to constitute an MAC
•
The parties should define their own test of what constitutes an
MAC; otherwise EBITDA is the appropriate benchmark
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9
Pfizer/Wyeth MAC clause
•
“Company Material Adverse Effect” means an effect, event,
development, change, state of facts, condition, circumstance or
occurrence that is or would be reasonably expected to be materially
adverse to the financial condition, assets, liabilities, business or results of
operations of the Company and its Subsidiaries, taken as a whole;
provided, however, that a Company Material Adverse Effect shall not be
deemed to include effects, events, developments, changes, states of facts,
conditions, circumstances or occurrences arising out of, relating to or
resulting from: (A) changes generally affecting the economy, financial or
securities markets or political or regulatory conditions, to the extent such
changes do not adversely affect the Company and its Subsidiaries in a
disproportionate manner relative to other participants in the
pharmaceutical or biotechnology industry; (B) changes in the
pharmaceutical or biotechnology industry, to the extent such changes do
not adversely affect the Company and its Subsidiaries in a
disproportionate manner relative to other participants in such industry;
(C) any change in Law or the interpretation thereof or GAAP or the
interpretation thereof, to the extent such changes do not adversely affect
the Company and its Subsidiaries in a disproportionate manner relative to
other participants in such industry;
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Pfizer/Wyeth MAC clause (cont’d)
•
(D) acts of war, armed hostility or terrorism to the extent such changes do not
adversely affect the Company and its Subsidiaries in a disproportionate
manner relative to other participants in the pharmaceuticals or biotechnology
industry; (E) any change attributable to the negotiation, execution or
announcement of the Merger, including any litigation resulting there from, and
any adverse change in customer, distributor, employee, supplier, financing
source, licensor, licensee, sub-licensee, stockholder, co-promotion or joint
venture partner or similar relationships, including as a result of the identity of
Parent; (F) any failure by the Company to meet any internal or published
industry analyst projections or forecasts or estimates of revenues or earnings
for any period (it being understood and agreed that the facts and
circumstances giving rise to such failure that are not otherwise excluded from
the definition of a Company Material Adverse Effect may be taken into
account in determining whether there has been a Company Material Adverse
Effect); (G) any change in the price or trading volume of the Company
Common Stock on the NYSE (it being understood and agreed that the facts
and circumstances giving rise to such change that are not otherwise excluded
from the definition of a Company Material Adverse Effect may be taken into
account in determining whether there has been a Company Material Adverse
Effect); and (H) compliance with the terms of, or the taking of any action
required by, this Agreement.
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11
Exxon Mobil/XTO Energy
MAC clause
•
“Company Material Adverse Effect” means a material adverse effect on
the financial condition, business, assets or results of operations of the
Company and its Subsidiaries, taken as a whole, excluding any effect
resulting from, arising out of or relating to … (B) other than with respect to
changes to Applicable Laws related to hydraulic fracturing or similar
processes that would reasonably be expected to have the effect of making
illegal or commercially impracticable such hydraulic fracturing or similar
processes (which changes may be taken into account in determining
whether there has been a Company Material Adverse Effect), changes or
conditions generally affecting the oil and gas exploration, development
and/or production industry or industries (including changes in oil, gas or
other commodity prices), (C) other than with respect to changes to
Applicable Laws related to hydraulic fracturing or similar processes that
would reasonably be expected to have the effect of making illegal or
commercially impracticable such hydraulic fracturing or similar processes
(which changes may be taken into account in determining whether there
has been a Company Material Adverse Effect), any change in Applicable
Law or the interpretation thereof …
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Break fees
•
What is a break fee?
•
Triggering events
•
Legal issues
•
Quantum of recent break fees
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What is a break fee?
•
US Origin
•
Now common place in Europe
•
Various forms of break fees
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Various forms of break fees
•
•
Break fees
–
arrangement between a bidder and or target company whereby a fee is paid to
the bidder if a specified event occurs which prevents the transaction from
completing
–
to meet some or all of a bidder’s costs
Reverse break fee
–
•
Reciprocal break fee
–
•
arrangement between a preferred bidder and a target where, in return for a
period of exclusivity, the preferred bidder has been willing to pay a fee if it fails
to proceed with its indicative offer
undertaking to pay break fees to be given by both parties to the transaction,
particularly in so called “mergers of equals” where the relative size of the parties
and strength of their negotiating positions are similar
Break fee from substantial shareholders
–
a bidder may for example seek a break fee from a substantial shareholder who
wishes to dispose of its shares or from a manager who will realize a substantial
saving on a public to private transaction
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15
Triggering events
•
Rejection of the offer by the board
•
A substantial shareholder does not accept the offer
•
Shareholders do not approve the necessary resolutions
•
Breach of the non-solicitation undertaking
•
Breach of representations and warranties
•
Absence of fulfillment of one or several conditions precedent at the closing date
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Legal issues
•
•
•
Best interests of the company and directors' duties
–
appreciation by the board
–
proper use of their powers
–
reciprocal break fees easier to justify
–
should not deter a third party from making an alternative proposal
–
size of the fee relevant
Financial assistance
–
test different from one country to another
–
but the concept exists everywhere
–
precautions to take
a)
provide some sort of consideration (it is not a gift)
b)
do not structure it as an indemnity for costs
c)
careful drafting mandatory
Frustrating action
–
EU Directive
–
quantum
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Quantum of recent break fees
•
In the US, they can reach 3 to 5% of the deal value but should not force
shareholders to vote for the deal
•
In January, Goldman Sachs entered into an agreement to acquire the La
Francia II concessions from Coalcorp Mining Inc. for $151 million.
Coalcorp has agreed to pay a breakup fee of $5.25 million in the event
that it terminates the agreement under certain circumstances
•
In the UK, in the 90s, the BP-Amoco merger and the Vodafone – Airtouch
transaction had breakup fees of respectively $550 and $775 million.
Today, 1% seems to be the limit in certain specific circumstances
•
The Alcatel-Lucent merger in 2006 had a reciprocal breakup fee:
•
–
$250 million if Alcatel terminated
–
$500 million if Lucent terminated
For a combined market
cap of $36 billion
Sap – business Objects: 2% of the outstanding equity value (or €86
million) – (in 2008)
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Earn out
•
What is an earn out?
•
Risks during earn out period
•
Practical experience
•
Structure of earn out provisions
•
Impact of earn out provisions on public take-overs
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What is an earn out?
•
•
General definition of earn out provision
–
a variable portion of the purchase price
–
payment after a certain time period following completion of the transaction
–
subject to the achievement of predefined performance indicators
Reasons for increasing popularity of earn out provisions
–
restrictive bank financing
–
overcoming the “valuation gap”
Due to the market and financial crisis target valuations differ heavily between
sellers and buyers while at the same time purchase price derives from
company valuation
–
financing effect for buyer
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Risks during earn out period
•
•
Risks for seller
–
seller continues to participate in the economic risks of the business
–
buyer could use his new influence in the company to minimize earn out
payments
–
buyer could fail to make the earn out payment due to financial difficulties
Risks for buyer
–
synergy effect might be smaller than expected due to postponed integration of
target into his own group of companies
–
seller – if still involved in management - could increase short term management
risk in order to increase earn out payment
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Overcoming the risks
•
•
•
Earn out provisions should
–
protect the seller from manipulation by the buyer
–
give the buyer the necessary control over the target to manage the target in his
interest
Provisions to avoid conflicts
–
comprehensive information rights for seller regarding accounting
–
joint audits and/or closing audit regarding benchmark test
–
reasonable consideration of extraordinary effects on performance indicators
Arbitration provision
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Practical observations
•
Financial performance indicators depend on the individual situation and
should be carefully considered. Commonly used criteria are EBITDA and
turnover
•
Types of earn out conditions
•
•
–
binary earn out provision
earn out payment depends 100% on performance indicator meets benchmark test
–
sliding scale provision
amount of earn out payment depending on realization of performance indicators,
e.g. 0 - 100% earn out payment depending on performance, beginning with
minimum realization of 90% of benchmark
Sellers are more likely to accept earn out provisions when they have the
chance to control the target during the earn out period by
–
holding managing position in the target company
–
receiving shares in the acquiring company
If buyer wants to integrate target into the buyer’s group immediately after
completion earn-out might not be appropriate
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Structure of earn out provisions I
Essential elements of an earn out provision
Duration
Earn out period (typically between 1 and 4 years)
Payment
Periodical payment or full payment at end of earn out
period
Performance indicators
Financial / non financial performance indicators
Accounting principles
German HGB / IFRS / US-GAAP
Definition and adjustment clauses
Clear contractual provisions on performance
indicators, including adjustment clauses for
extraordinary factors
Benchmark
Fix, cumulative or variable benchmark based either
on previous financial figures or on financial
projections
Calculation of variable purchase
price
Allocation of profit between seller and buyer if
achieved performance exceeds benchmark
Caps
Limitation of maximum variable purchase price
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Structure of earn out provisions II
Further important aspects when drafting an earn out provision
•
Performance indicators should be objective, comprehensible, target
orientated and independent from strategic decisions
•
Extraordinary financial factors should be clearly defined. Otherwise,
performance indicators could be modified by intentional manipulation.
Examples: costs of integration or financing as a result of the acquisition;
extraordinary write-offs or reserves; effects resulting from a change of
accounting policies
•
Provisions for extraordinary events during the earn out period such as
restructuring, integration into another company, merger
•
Sellers may ask for security for payment of earn-out and/or for payment of
interest
•
Arbitration
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Impact of earn out provisions on
mandatory public take-over offer
•
Acquisition of at least 30% in a listed German company triggers a mandatory
public take-over offer to the outstanding shareholders
•
Due to the principle of equal treatment buyer has to offer the same share price
to all shareholders which he paid or agreed to pay in the last six months
(Section 31 WpÜG, Sections 3 ff. WpÜG-AngV)
•
So far there is no binding precedent whether earn out payments are relevant
to the calculation of the take-over share price
•
BaFin (the German Federal Financial Supervisory Authority) follows a two step
approach
–
Earn out provisions are not relevant for the take-over bid document, i.e. the share
price offered in the document does not need to consider the earn out provision.
–
However, if the performance indicators finally meet the benchmark and the buyer
has to make a payment under the earn out provision the other shareholders
accepting the take-over offer have a supplementary pecuniary claim by analogy with
Section 31 V WpÜG.
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Q&A
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