Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with whichMayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

DUE DILIGENCE FROM A BUYER’S PERSPECTIVE:

An Overview of the Due Diligence ProcessDallas Parker713.238.2700dparker@mayerbrown.comWilliam S. Moss III713.238.2649bmoss@mayerbrown.com

September 2010

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Review of M&A Basics: Due Diligence Objectives

• Due Diligence is:– Investigation of the target business or assets

– Evaluation of factors that may have a future impact on the business or assets

– Confirmation of information provided by the seller and its advisors

• Objective is to identify:– Factors that affect acquisition decision and/or valuation

– Risks associated with ownership of the Target/target assets

– Obstacles to effecting the transaction or realizing the investment objectives

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Identify Risks and Confirm Assumptions

• The due diligence process should:– Confirm the Seller/Target has title/rights to key assets

– Identify potential liabilities and risks

– Determine or confirm valuation

– Identify any obstacles to effecting the transaction (third party consents, regulatory approvals, etc.)

– Identify issues that will affect the reps and warranties

– Identify steps necessary to integrate the business/assets into the Buyer’s operations

– Confirm that the acquisition will meet the Buyer’s investment objective

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Impact on Transaction

• Viability

• Structure, scope and timing

• Transaction details– Valuation

– Purchase agreement• Structure and timing of payments

• Representations and warranties

• Pre-closing covenants

• Closing conditions

• Indemnification

• Deal terms (including representations and warranties and indemnification provisions) and purchase price can be materially affected by issues identified during due diligence review

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Importance of Effective Due Diligence

• Reduces Risk (and Related Costs) of a Failed Deal

• Contractual Protections May Be Insufficient– The Seller may not be willing (or able) to provide sufficient

post-closing indemnification to cover all losses

– Certain issues cannot be cured with dollars

– Acquisition agreement may limit recovery• Survival of representations and warranties

• Caps, baskets and deductibles

• Limits on consequential damages/lost profits

• Time, expense and risk of litigation

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Seller’s Due Diligence Responsibilities

• Data Room Preparation– Gather, organize and index documents obtained from

appropriate business units and specialty teams

– May be necessary to redact documents due to contractual confidentiality restrictions, “political” implications of disclosure or sensitive terms (e.g., customers, pricing, margins)

– May be appropriate to withhold certain documents until later in the process

• Prepare Management Presentation

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Seller’s Due Diligence Responsibilities

• Preparation of Disclosure Schedules– Seller will prepare schedules to the definitive agreement based

on its own due diligence review

– Some of the schedules will be based on information contained in the data room. Other schedules will be based on information obtained from inquiries of the relevant individuals who are responsible for the business being sold

• If Seller is receiving stock as consideration, the Seller will need to conduct a more thorough due diligence investigation – not materially different that Buyer’s due diligence investigation.

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Buyer’s Due Diligence Responsibilities

• Prepare due diligence checklist

• General legal contract review– Assignment/change of control provisions that might be triggered as a result

of contemplated transaction

– Exclusivity, non-compete, most favored nation provisions

– Parties’ ability to terminate contract before end of term

• Prepare summary of key commercial terms of contracts, if requested

• Review of financial information and other corporate-type documents (e.g., correspondence with government agencies, letters from outside legal counsel to auditors, correspondence with outside legal counsel to auditors, correspondence with auditors regarding issues or disputes)

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Buyer’s Due Diligence Responsibilities

• Specialists should review tax, environmental, IP and benefits related documents

• Attend management presentation; ask follow-up questions as appropriate

• Due diligence report may be prepared – Summarize documents reviewed and discussions with Seller and its

representatives

– Identify and quantify any problems or opportunities and propose solutions/alternatives

• Identify areas where further due diligence may be warranted or desirable

• Confirm information contained in disclosure schedules

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Key Sources of Information

• External — helps corroborate information received from the Target– Public documents

– Lien searches

– Litigation searches

• Seller/Target– Data room materials

– Management presentations and site tours

– Offering memoranda and other marketing materials

– Press releases and other information from the Target’s website

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Organizing the Due Diligence Process – Goals

• Defining Goals and Setting Expectations– Deliverables

– Key Considerations

– Process

– Timing

– Budget

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Organizing the Due Diligence Process – Scope

• Factors affecting the appropriate scope of review include:– Deal structure and size – what is material to the deal?

– Industry of the Target business/assets

– Location of operations

– Value drivers

– Cost and time constraints

– Identity of the Target

– Competition

– Financing

• Generally want to be covered either by due diligence review or reps and warranties.

• Extensive reps and warranties may reduce scope of due diligence review.

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Managing the Due Diligence Process

• The Due Diligence Team– Legal

– Business/Subject matter experts• Tax, litigation, employment, labor, IP, environmental, etc.

– Financial

– Regulatory

– Insurance/Risk management

– Foreign counsel

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Managing the Due Diligence Process

• Organization– Team Leader/Point Person

– Allocation of responsibilities

• Distribution and Tracking Plan

• Communication Plan– Extremely important aspect of due diligence process

– Confidentiality requirements

– Process and Timing• Up the chain

• Between due diligence team and drafting team

• Between the Buyer and the Seller/Target

• Often different teams handling due diligence and negotiations

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Special Issues – Competitors

• Legal Restrictions– Antitrust laws may prohibit competitors from exchanging

certain information prior to consummation of the transaction (e.g., pricing)

• Seller/Target Imposed Limits

• Solutions– Redact (pricing, customer information, etc.)

– Clean Team

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Due Diligence - Upstream

• Proven Developed Reserves (PDPs) only? Other proven categories? Any value given to Probables / Possibles?

• Comparison to independent engineering report

• “As of” date?

• File review only vs. updated records checks by landmen / title counsel

• Is “check stub” title good enough?

•What does the lender require?

• How good is “Exhibit A” – the list of material O&G properties?

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Due Diligence – Midstream/Pipeline

• A good system map?

• Schedules of easements / rights of way

• Compressor / pump station / terminal sites

•What sort of real property title diligence currently exists & can be built upon? How extensive should additional real property title diligence be?

• How to conduct a practical environmental assessment project?

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Due Diligence – Power

• Title insurance on plant sites

• Easements / Rights of way for –– General / Vehicular Access

– Fuel (gas) pipelines - inputs

– Transmission lines - outputs

– Water supply lines / storage

– Stations / substations

– Interconnection facilities

– Any shared facilities?

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with whichMayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

DUE DILIGENCE FROM A BUYER’S PERSPECTIVE:

FCPA Due Diligence

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FCPA Overview

• US law passed in 1977 to prohibit bribery of foreign officials/first aggressive anti-bribery statute among developed nations

• Two main components:– Anti-Bribery Provisions

Prohibits bribes (or offers to bribe) made to foreign officials, political parties, candidate for public office whether made directly or through a third party for the purpose of obtaining or retaining business

– Accounting ProvisionsRequires companies to maintain accurate books and records and adequate accounting and financial controls. No allegations of bribery are required

– Joint JurisdictionUS Department of Justice (bribery & corruption-criminal) and US Securities & Exchange Commission (books and records-civil)

– Violations Include both criminal and civil penalties, including imprisonment, fines, loss of export licenses and suspension from competing on government contracts

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Who is liable under the FCPA?

• Domestic– All US “issuers” and private companies (“domestic concerns”)

using instrumentalities of interstate commerce

– Any US corporation or national engaging in any foreign bribery-related conduct

– US citizens or foreign nationals operating in the US or using instrumentalities

• Foreign– Foreign corporations subject to SEC regulation (e.g., via ADRs)

and using instrumentalities

– All foreign corporations when in US territory, whether or not they use instrumentalities of interstate commerce

• Includes directors, officers, employees, and agents of entities subject to the statute

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FCPA Penalties: Criminal and Civil

Corporate Sanctions• Fines of up to $2 million for each violation

of the anti-bribery prohibition

• Fines of up to $25 million for violation of accounting provision

• Record $800 million in monetary sanctions in Siemens

• Disgorgement of proceeds associated with improper payments

• Injunction to prevent future violations

• Suspension and debarment

• Compliance Monitor

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FCPA Penalties: Criminal and Civil

Individual Sanctions• Up to $250,000 per criminal violation

– Government prohibits indemnification for fines

• Up to 5 years imprisonment– Recent sentences: 36 months, 18 months, 6 months

• Equitable Remedies: Injunction, bar from serving as director or officer

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FCPA and M&A Transactions

Deloitte Survey on International Business Transactions

• 87% always or frequently conduct background checks before international M&A activity; 67% always do so

• 67% always or frequently conduct background check before international joint venture activity; 49% always do so

• 57% have restructured or renegotiated potential deal based on information uncovered during background checks; 70% have pulled out of a deal

Source: “Look Before You Leap: Investigative Due Diligence in International Business Relationships.” (available at http://www.deloitte.com/dtt/whitepaper/0,1017,sid%253D2007%2526cid%253D150086,00.html)

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Potential FCPA Exposures in M&A Transactions

• Acquisition involving government owned or controlled entity or where the government has an ownership interest

• Need for government authorization of private entity acquisition

• Inherit liability for past FCPA violations when acquiring private entity (“successor liability”)

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FCPA in the M&A ContextEnforcement Actions

• Lockheed/Titan (2005)While conducting pre-acquisition due diligence of Titan, Lockheed discovered payments to obtain telephone contract in Republic of Benin. Deal failed to close because of FCPA problems. Titan prosecuted

• GE/InVision (2005)While conducting pre-acquisition due diligence of InVision, GE discovered FCPA concerns. The Target had enlisted consultants to obtain contracts for equipment in China, Thailand and Philippines. Deal closed, the Buyer forced the Target to make a voluntary disclosure

• Latin Node (2009)First FCPA action filed based entirely on pre-acquisition conduct unknown to the Buyer when the transaction closed

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FCPA in the M&A Context:DOJ Opinion Procedure Release No. 08-02

• Halliburton sought advice from the DOJ concerning its potential FCPA liability in connection with a proposed acquisition of a UK oil field services company

• UK law prevented access to the information necessary to complete appropriate FCPA due diligence prior to closing

• Halliburton informed the DOJ it would impose an FCPA policy on the UK company and implement a post-closing FCPA due diligence work plan on third parties, joint ventures, customs, etc.

• Halliburton would report the results of any risks found to DOJ

• DOJ recognized the insufficient time and inadequate access to complete the pre-acquisition FCPA due diligence

• DOJ determined not to take any enforcement action against Halliburton

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Factors to Consider in Designing Pre-Merger Due Diligence Process

• Education of diligence team on FCPA issues

• Factor in necessary time for FCPA review

• Follow up on identified Red Flags and risk areas

• Document, document, document due diligence steps

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DOJ View on Due Diligence Questions

Alice Fisher, Former Assistant Attorney General, identified five questions Buyers should ask Targets during due diligence• Interaction with foreign governments as customers

• Interaction with foreign governments as JV partners

• Government licenses and approvals required to operate abroad

• Requirements relating to customs in foreign countries

• Relationship with 3rd-party representatives, including how those representatives vetted

• “The Department has seen each of these areas as fraught with challenging FCPA issues, and, if possible, an acquiring company should be comfortable that it has assessed those risks before closing a deal.”(Alice Fisher, November 2007)

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Protection Through FCPA Reps and Warranties

• Overview of typical FCPA representation and warranty– No corrupt payments were made by the Target to foreign

officials, either directly or indirectly, for the purpose of obtaining or retaining business, or to otherwise securing an improper advantage

– Absence of government officials as owners or in other relevant provisions

– Books and records are accurate and complete

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FCPA Due Diligence

Assess the existence and awareness of systems and controls over the following areas:• Expense claims, payments and petty cash disbursements

• Use of agents and outside consultants

• Entertainment and gifts provided to third parties

• Contracting with government bodies

• Fraud response mechanisms

• Identification and monitoring of relationship development and maintenance with state-owned enterprises and their employees

• Accurate recording of transactions within the target’s books and records

• Record keeping protocols in respect of transactions recorded in the books and records

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FCPA in the M&A Context

Buyer Due Diligence Checklist• Assess corruption levels of the Target’s country and industry

(Transparency International Index) • Evaluate the Target’s compliance program

– Clear policies and procedures, senior management oversight, third-party processes, training, hot line reporting

• Request information on prior FCPA problems• Analyze existing internal controls and perform financial audits on

the Target’s books and records• Include in the acquisition agreement FCPA compliance and

resolution of FCPA issues as a condition of closing• Voluntarily disclose to DOJ and SEC past unlawful activity before

closing

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Q & A

Thank you