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Private M+A Deal Points

May 27, 2013

Jonathan M.A. Melmed

This is MoFo. 2

I. Purchase Price:A. Adjustment calculation

Market Position

No AdjustmentProvision

18% of deals

IncludesAdjustmentProvision

82% of deals

• 79% of deals include an adjustment using working capital only.

• A smaller percentage of deals use multiple metrics to calculate the adjustment, including:

• Working capital• Earnings• Debt• Assets• Cash

• Multiple metrics are especially preferred where target valuation is less certain.

• Using working capital only limits the number of balance sheet items to be manipulated by buyer.

ENERGY: Working capital is more common.

This is MoFo. 3

I. Purchase Price:B. Preparation of closing balance sheet

Buyer Preference:Buyer

86% of deals

Other4% of deals

Seller Preference:Seller

9% of deals

ENERGY: GAAP consistent with past or scheduled practices is more common.

Market Position

This is MoFo. 4

I. Purchase Price:C. Separate escrow for purchase price adjustment

BuyerPreference: Yes

35% of deals

SellerPreference: No

65% of deals

Market Position

ENERGY: Escrow is almost never used.

This is MoFo. 5

I. Purchase Price:D. Earnout

• If earnout is included, the most common earnout metrics are:

Seller Preference: No62% of deals

Market Position

Buyer Preference:Yes 38% of deals

Note: 5% of earnouts were based on more than one metric.

ENERGY: Escrow is almost never used.

This is MoFo. 6

II. Representations and Warranties of Seller/Target:A. General qualification of representations

is more common than

Buyer Preference: Undefined “materiality” exception

Seller Preference: MAC exception

ENERGY: MAC exception is more common.

This is MoFo. 7

II. Representations and Warranties of Seller/Target:C. Financial statements – fair presentation

In both scenarios, financial statements fairly present the financial condition and the results of operations of target.

• The difference between these options is whether the financial statements are qualified by an “all in accordance with GAAP” clause.

Market Position

Buyer Preference: Not GAAP Qualified 76% of deals

Seller Preference: GAAP Qualified 24% of deals

ENERGY: GAAP qualified is more common.

This is MoFo. 8

II. Representations and Warranties of Seller/Target:D. No undisclosed liabilities

Buyer Preference Seller Preference

•Except as scheduled, no liabilities at all except those that target has reflected/reserved against in the balance sheet

•Except as scheduled, target has no liabilities of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP

Market Position

ENERGY: GAAP Liabilities is more common.

This is MoFo. 9

II. Representations and Warranties of Seller/Target:E. Compliance with law

TELECOM: Due to the number of applicable federal, state and local laws, sellers and targets are generally successful in qualifying their Compliance with Law representation by knowledge and/or materiality.

ENERGY: Seller typically represents that the project company has all permits required to conduct its business as currently conducted and that each permit is in full force and effect. Seller will seek to qualify these representations to the extent failure to have such permits would constitute a MAC.

Buyer Preference Seller PreferenceYes•Do not limit with any qualifications;•Cover current and past violations; and•Include representation that no notices of violation or investigation have been received.

No•Seek to qualify with materiality or material adverse effect and knowledge;•Cover current violations only; and•Do not include representation that no notices of violation or investigation have been received.

Market Position

This is MoFo. 10

II. Representations and Warranties of Seller/Target:F. 10b-5/Full Disclosure

10b-5/Full Disclosure means that seller made no representations containing any misstatements or omissions of a material fact that would make the representations misleading (seller disclosed all that it knows)

• When included, not qualified by knowledge (77% of deals)

Market Position

Buyer Preference: 10b-5 formulation only

31%

Buyer Preference:10b-5 and Full Disclosure

formulation4%

Full disclosure formulation only

2%

Seller Preference: Not included

63°/o

ENERGY: Use of 1 Ob-5/Full Disclosure representation is rare.

This is MoFo. 11

II. Representations andWarranties of Seller/Target

ENERGY Footnotes:

•In power plant deals, seller or target typically represents whether it is a public utility or public service company and that it has various powers and authority under the Federal Power Act granted by the Federal Energy Regulatory Commission (for example, authority to sell energy and issue securities).•It is common for seller or target to represent that target has sufficient assets to operate the facility/project as currently operated, except for a lack of such assets that would not reasonably be expected to result in a MAC.•In renewable energy deals, it is common for seller/target to represent whether the projects are eligible for various tax subsidies and credits.•Energy transactions often involve greater levels of environmental due diligence, and the environmental representations tend to be relatively detailed.•Buyer will typically request that all material contracts be scheduled; seller/target will attempt to introduce dollar thresholds to determine materiality of contracts to be disclosed.

TELECOM Footnotes:

•Due to the wide geographic scope of telecom businesses, seller/target is frequently required to make a broad representation that target is qualified and in good standing to do business in every jurisdiction in which the nature of target's business makes such qualification necessary.

This is MoFo. 12

III. Buyer’s Closing Conditions

Six Issues:

A.Regulatory approvals

B.No legal proceedings

C.No material adverse change

D.Buyer financing/funding condition/out

E.Bring-down of representations

F.Legal opinion (non tax) of target's counsel

Note: 30% of deals were “simultaneous sign-and-close”.

ENERGY: It is a common condition to seller's obligation to close that buyer has arranged

for seller and seller's affiliates to be released from scheduled guarantees and credit

support obligations relating to the target or assets being sold. In some transactions

buyer may back-stop seller's credit support obligations and continue to use commercially

reasonable efforts to cause seller and its affiliates to be released post-closing.

This is MoFo. 13

III. Buyer’s Closing Conditions:A. Regulatory approvals

Regulatory approvals are usually deal-specific to comply with applicable laws.

ENERGY:

•In addition to standard regulatory approvals, certain transactions in the energy sector require the approval of the U.S. federal and/or state energy regulatory commission(s), which approval(s) may take many months to procure. It is not uncommon for acquisition agreements in the energy sector to contemplate that both parties remain committed to the transaction for at least two years: plus an additional six months or more if the only unfulfilled condition to closing is obtaining regulatory approval; during such lengthy pre-closing period, business opportunities may change. Also, due to the length of time between signing and closing, there is greater risk of the occurrence of a MAC

TELECOM:

•Depending on the type and jurisdiction of the transaction, in addition to the standard regulatory approvals, both seller and buyer may need to obtain all or a combination of United States Federal Communications Commission, Department of Justice, Federal Trade Commission, state and/or local government approval. In addition, international transactions may require further regulatory approvals from foreign authorities. It is important to note that many U.S. state statutes invalidate transactions if the proper regulatory approvals have not been obtained.

•The length of the review period for such regulatory approvals varies according to the size of the transaction, but it is not uncommon for the length of such review period to be measured in months when the transaction value exceeds $60 million, and weeks or days when smaller.

This is MoFo. 14

III. Buyer’s Closing Conditions:C. No material adverse change

Buyer Preference Seller Preference

•MAC as a stand-alone closing condition •Back-door (i.e., MAC or absence of changes representation, but no MAC closing condition)

Market Position

Stand-alone vs. back-door

Both, 53%

Neither, 17% Seller Preference: NoStand-alone MAC

condition, but may include absence of

changes or back-door representation, 17%

Buyer Preference: Standalone MAC condition, 23%

ENERGY: Stand-alone MAC condition is more common.

This is MoFo. 15

III. Buyer’s Closing Conditions:C. No material adverse change

MAC period

is more common than

Buyer Preference: Since the balance sheet date

Seller Preference: Since the date of the agreement

ENERGY: Since the date of the agreement is more common.

This is MoFo. 16

III. Buyer’s Closing Conditions:C. No material adverse change

Carve-outs used in the definition of MAC

Buyer Preference Seller Preference

• No carve-outs • Yes, broad carve-outs

Market Position

ENERGY: The burden of obtaining regulatory approval can be so great that acquisition agreements frequently excuse acquirers from consummating a transaction if obtaining regulatory approval is sufficiently onerous (e.g., size of rate reductions in energy selling prices or required spin-offs of business units) that it is likely to result in a MAC on the business of target going forward.

Additional common carve-outs include change in price of commodities, electricity rates, fuel, natural gas, and industry changes (such as tariffs).

Carve-out means:

No Mac if it is a result of events not under seller’s control.

This is MoFo. 17

IV. Covenants

• Two issues:• Provision if benefits to target's. employees post-closing by buyer• Legal fees of seller

ENERGY:• It is typical for both buyers and sellers to covenant that they shall use

commercially reasonable efforts to obtain necessary federal, state and local government regulatory approvals, such as approvals required by the Federal Energy Regulatory Commission (for example, approval under Section 203 of Federal Power Act).

• It is typical for seller to provide buyer with reasonable access and right to inspect the facility/project.

TELECOM: Telecom entities frequently spin-off business units prior to Closing in order to comply with antitrust or regulatory requirements. In such cases, particular attention should be paid to licenses and intellectual property spun-off that may be integral to the seller of such spun-off entities.

This is MoFo. 18

V. Indemnification:A. Survival or representations and warranties

Note: Buyer typically seeks to ensure that survival period will run through at least one audit cycle.

Private equity funds in particular are typically averse to longer indemnification periods for various reasons, including the limited life and investment period of such funds, general partner liability, lack of a desire to “claw back” distributions from their limited partners and the negative impact on their "I RR" calculations. As such, transactions in which seller is a private equity fund typically contain shorter indemnity periods, or none at all.

ENERGY: 12 months is typically the highest limit.

Party Preferences

Compromise I Market Position

This is MoFo. 19

V. Indemnification:A. Survival or representations and warranties

Carve-outs to survive limitation (cont.)

ENERGY: Depending on the exposure to environmental liability of the assets or business being acquired, buyer may insist that seller’s or target's environmental representations survive relatively long, and that the indemnity for such environmental liability feature a relatively low basket and/or a high cap.

This is MoFo. 20

V. Indemnification:B. Limitations on indemnity

Buyer Preference •First dollar threshold•i.e., once losses exceed certain threshold amount, buyer is entitled to be indemnified from the first dollar of the losses

Seller Preference •Deductible•i.e., buyer is entitled to be indemnified only for those losses that exceed the agreed minimum amount or deductible

Basket: deductible vs. first dollar threshold

Market Position

ENERGY: Combination of both is more common.

Buyer Preference:First dollar threshold

31%

Seller Preference:Deductible

59%

This is MoFo. 21

V. Indemnification:B. Limitations on indemnity

Basket (as % of transaction value or purchase price)

Note: Transaction value is a relevant-criterion in transactions that include an assumption of debt.

ENERGY: 0.2% is more common.

This is MoFo. 22

V. Indemnification:B. Limitations on indemnity

Buyer Preference Seller Preference

• No cap (exceedingly rare);• Seek 100% of transaction value or

purchase price; or• Exclude areas with potentially

significant liabilities (such as environmental matters)

• Seek low cap such as (as a percentage of transaction value or purchase price)

• 5%; or• Equal to the escrow

Compromise / Market Position

•<10% (43% of deals)•10% (14% of deals)•10-15% (17% of deals)•15-25% (14% of deals)

ENERGY: 10% of purchase price is more common.

Cap (as % of transaction value or purchase price)

This is MoFo. 23

V. Indemnification:D. Stand-alone indemnifications/special indemnities

Buyer Preference Seller Preference

• No • Yes

Market Position

Depends on Buyer's due diligence review

Stand-alone indemnifications/special indemnities means:Items for which indemnification is specifically provided forregardless of the general indemnification provision and which are not subject to any indemnificationlimitations or qualifications.

ENERGY: Tax and environmental are common stand-alone indemnifications.

This is MoFo. 24

V. Indemnification:D. Stand-alone indemnifications/special indemnities

Buyer Preference Seller Preference

• No set-offs and buyer is not expressly required to mitigate its losses

• See set-offs and require buyer to mitigate its losses

Market Position

•Common express set-off positions:Express set-off/mitigation means:Reduction of buyer's indemnification claims

ENERGY: Express set-off for insurance is very common.

This is MoFo. 25

V. Indemnification:F. Type of damages/losses covered

Buyer Preference Seller Preference

• See to expressly include diminution in value, and incidental, consequential and punitive damages

• Seek to expressly exclude diminution in value, and incidental, consequential and punitive damages

Market Position

•Generally, most deals are silent with respect to the description of damages •Specifically, deals expressly include description of:

ENERGY: Most deals specifically exclude consequential damages

This is MoFo. 26

V. Indemnification:G. Escrow/Holdback

Buyer Preference Seller Preference

• Yes • No• Or, if there is an escrow. make it the

exclusive remedy• Seller generally prefers a clawback to

satisfy indemnity claims rather than escrow/holdback

Escrow/Holdback to satisfy indemnity claims

Market Position

BuyerPreference:

Yes86%

SellerPreference:

No14%

ENERGY: Escrow/holdback is almost never used.

This is MoFo. 27

VI. Dispute Resolution:A. Governing Law

Buyer Preference Seller Preference

• Buyer's state of incorporation or place of business

• Target's state of incorporation or place of business

Market Position

•Between Buyer's and Seller's state of incorporation, choice of law is almost equally split•Irrespective of the state of incorporation or place of business, parties choose:

Delaware or New York

Note: Private equity funds generally tend to avoid non-money-center jurisdictions and jury-adjudicated outcomes.ENERGY: New York is the most common jurisdiction.