In This Issue
INDUSTRY INTEREST
New M&A Deal Terms Study Serves as Key Benchmark for Attorneys and Investors
After serving on over 100 deals, Shareholder Representative Services reports on market terms in private-target M&A transactions.
TAX TIP
Expiring Tax Cuts
and the Implications for Your Escrows
Advice on how you may be able to take advantage of lower rates before December 31st.
BEST PRACTICES
Selling Your Company May Require Multiple
Law Firms
Understanding the trend towards having a separate firm that represents the interests of a stockholder or group of stockholders.
INDUSTRY INTEREST
New M&A Deal Terms Study Serves as Key Benchmark for Attorneys and Investors
Entrepreneurs and investors who sell privately held companies face complex negotiations with outcomes that can have dramatic effects on net purchase consideration. To help stockholders better understand whether their deals are meeting or exceeding market norms, SRS recently released a comprehensive analysis of private-target M&A deal terms. It is the first of its kind to analyze transactions where deal-specific terms were not publicly reported.
Sampled from the over 100 transactions in which SRS has served as the shareholder representative, the 2010 SRS M&A Deal Terms Study is an analysis of private-target acquisition agreements for deals from a variety of industries that closed between 2007 and 2010.
The study reveals that the post-closing period can often be long, risky and complex. Two-thirds of the surveyed deals called for setting aside a portion of the merger consideration in escrow for more than a year. Also, more than two-thirds of the deals analyzed allowed for possible changes to the final purchase price after the closing based on working capital adjustments. Even when the escrow period concludes, consideration is often still at risk. According to the study, 95% of deals have carve outs to the survival period so that certain types of claims can be brought well into the future.
Other highlights of the study include:
- In more than half of the deals analyzed, the amount of consideration put into escrow was more than 10% of the total merger consideration. In a 2007 study conducted by the American Bar Association (ABA), only one-quarter of the deals had escrows of more than 10%.
- 65% of deals included a "first dollar" basket, meaning the purchaser could recover all losses after meeting a certain threshold amount. In a 2005 study by the ABA, a majority of deals included a "deductible" basket, which allows purchasers to recover only the portion of damages in excess of the threshold amount.
- Half of the deals analyzed that included earnouts had earnout terms of three years or more, with nearly one-third (32%) calling for an earnout period of five years or more.
SRS plans to build on the 2010 SRS M&A Deal Terms Study with future offerings that include data regarding what actually happens with escrows and earnouts and the claims that are made. This should allow for better forecasting of future cash flows.
TAX TIP
Expiring Tax Cuts
and the Implications for Your Escrows
As every dealmaker knows, the Bush era tax cuts are scheduled to expire at the end of 2010. This could impact the timing and tax treatment of transactions in a number of ways.
First, sellers may be looking to expedite closings of deals that are in process this quarter. If a transaction would normally close in early 2011, there could be a strong incentive to move more aggressively on satisfaction of closing conditions to get it done before year end. We are seeing an increase in fourth quarter M&A, which likely is due in part to these tax driven motivations. Buyers may be willing to expedite their normal process but might ask for some form of compensation in exchange.
 Second, the parties will have to consider the tax treatment of future payments related to a merger. While closing a transaction in 2010 could provide tax savings on initial merger consideration received this year, the parties also have to address the impact tax increases could have on later payments from escrows or earnouts. In prior years, most sellers elected to have their transaction taxed under the installment method whereby merger proceeds are taxed when received. Given the possibility of an increased capital gains tax next year, and with especially low current interest rates, selling shareholders might investigate opting out of installment tax treatment and paying tax on the full amount of merger consideration now.
Third, investors may want to look at deals that closed in the past but have payments that are scheduled to come due in early 2011. If you've already filed your tax return reporting the gain from initial merger consideration, it is probably too late to opt out of installment tax treatment. You may, however, be able to negotiate for an early escrow release. If a buyer has substantial comfort that it is not going to bring an indemnification claim against a particular escrow, it might be willing to move up the expiration date in exchange for a payment of some amount from that escrow. This is effectively a way for the buyer and seller to split the tax savings. A similar analysis would apply to earnouts coming due.
Of course, these tips presume that Congress won't act to extend the Bush era tax cuts. Therefore, realizing these benefits is uncertain. As with every other aspect of the transaction, we encourage you to consult with your legal and tax advisors as to what is best in your situation.
BEST PRACTICES
Selling Your Company May Require Multiple Law Firms
Typically, M&A deals have been done by two law firms--one for the buyer and one for the selling company. Recently, however, we've seen a trend toward having a separate firm that represents the interests of a stockholder or group of stockholders.
The stockholders will do this for a couple reasons. The first is to ensure that their interests are fully protected with respect to issues such as how merger proceeds are distributed, whether third parties are receiving payments that could reduce the amount paid to stockholders, and what liabilities are being assumed by the stockholders or their representatives in connection with the transaction.
 The second reason for separate stockholder counsel is to ensure that at least one of the attorneys who represented the sell side in connection with the deal will continue to be available to the shareholders after the closing of the transaction. The selling company's attorneys may be conflicted out from assisting the selling stockholders after closing. The company (rather than the stockholders) was that firm's client, and that client was merged into the buyer, which means the buyer may own that attorney-client relationship after closing. In contrast, a lawyer who represented the stockholders in the deal will not have any such conflict.
Similarly, the question has been raised as to whether the party agreeing to serve as the shareholder representative following closing should be separately represented. Whoever assumes that job is taking on significant responsibility and potential liability and should make sure they fully understand and agree to the terms applicable to them in the agreement. While seller's counsel may consider it part of their job to negotiate for favorable terms applicable to the shareholder representative in some cases, the representative typically is not their client. In fact, the interests of the representative are to some degree in conflict with the interests of their client (or the beneficial owners of their client) on issues such as the level of indemnification the representative receives from the selling shareholders and the duties the representative owes to such shareholders. We have seen several agreements in which the final document contained terms that, in our view, representatives never should have agreed to and likely would not have had they been separately represented in the negotiating process.
Our suggestion is that anyone considering serving as the representative on a volunteer basis should tell the company that their willingness to possibly take the job is dependant on them first being represented by separate counsel in connection with the negotiations, and that they will expect the company to be responsible for payment of the related legal expenses regardless of whether they eventually agree to accept the position. Even with separate representation, the person may elect not to accept the position, but the separate representation should be a condition to be met before other factors will even be considered. This should be acceptable to the company because having a strong representative is in the best interests of all of its shareholders, and this should be a necessary step in making that happen.
Originally published in peHUB August 2010
|
Just Published
2010 SRS M&A Deal Terms Study
A comprehensive analysis of the terms of private-target acquisition agreements.
Download a copy.
In the News
10.13.10 | WSJ
The Tough Terms of Selling a Tech Company
Read Article
10.13.10 | TechCrunch
The Survey Flip-Advocates Don't Want You to Read
Read Article
10.15.10 | Law.com
Headaches Can Crop Up After Private Deals Close, M&A Study Finds
Read Article
10.22.10 | NASDAQ.com
Deal Term Survey for Private-Target Acquisitions
Read Article
Recent Transactions
About SRS
SRS | Shareholder Representative Services is the leading expert in professionally managing the post-closing process to safeguard selling shareholders' interests in M&A transactions. On deals valued in aggregate in excess of $10 billion, SRS has represented more than 400 VC and private equity firms and over 10,000 shareholders in 44 countries. We have more knowledge and experience in serving as a shareholder representative than anyone else.
For more information visit www.shareholderrep.com
SRS Blog
For more
insights into
VC-backed M&A and post-closing issues,
Check Out Our Blog
Contact Us
SRS |
Shareholder Representative Services
415.367.9400 San Francisco
650.648.9550 Silicon Valley
303.648.4085 Denver
info@shareholderrep.com
www.shareholderrep.com
|
