m&a trends in deal terms and tactics: understanding recent...

M&A Trends in Deal Terms and Tactics: Understanding Recent Legal Challenges, Leveraging Case Law, and Learning through Mock Negotiations

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TUESDAY, NOVEMBER 20, 2012

Presenting a live 90-minute webinar with interactive Q&A

Craig Menden, Partner, Cooley, Palo Alto, Calif.

Jessica C. Pearlman, Partner, K&L Gates, Seattle

Paul Koenig, Managing Director, Shareholder Representative Services, San Francisco

Mark J. Gentile, Director, Richards Layton & Finger, Wilmington, Del.

Richard Arnold, Vice President and Associate General Counsel,

Mergers & Acquisitions, Hewlett-Packard Company, Palo Alto, Calif.

A Project of the Mergers & Acquisitions Market Trends Subcommittee,Mergers & Acquisitions Committee of the American Bar Association Business Law Section

2011 Private TargetMergers & Acquisitions

Deal Points Study(For Transactions Completed in 2010)

M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 2011 Private Target Study, slide 1

Release #2: 17Jan12

2011 Private Target 2011 Private Target Mergers & Acquisitions Mergers & Acquisitions

Deal Points StudyDeal Points Study(For Transactions Completed in 2010)(For Transactions Completed in 2010)


Release #2: 17Jan12

A Project of the M&A Market Trends Subcommittee,Mergers & Acquisitions Committee

of the American Bar Association’s Business Law Section

Subcommittee ChairJessica C. Pearlman, K&L Gates LLP

Past Subcommittee ChairsWilson Chu, K&L Gates LLP (Founding Subcommittee Chair)

Larry Glasgow, Gardere Wynne Sewell, LLP (Founding Subcommittee Chair) Keith A. Flaum, Dewey & LeBoeuf LLP

James R. Griffin, Dewey & LeBoeuf LLP

Chair, Mergers & Acquisitions CommitteeLeigh Walton, Bass Berry & Sims PLC

2011 Private Target M&A Deal Points Study2011 Private Target M&A Deal Points Study(For Transactions Completed in 2010)(For Transactions Completed in 2010)


Release #2: 17Jan12

2011 Private Target Study Working Group2011 Private Target Study Working Group

CHAIRS

Wilson Chu Dallas, TX

K&L Gates LLP

Jessica Pearlman Seattle, WA

K&L Gates LLP

ISSUE GROUP LEADERS

Mark Danzi Hill Ward Henderson

Tampa, FL

Robert DelPriore Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

Memphis, TN

W. Ashley Hess Baker & Hostetler LLP

Cincinnati, OH

Hendrik Jordaan Morrison & Foerster LLP

Denver, CO

Michael Kendall Goodwin Procter LLP

Boston, MA

Craig Menden Cooley LLP

Palo Alto, CA

Carl Sanchez Paul Hastings LLP

San Diego, CA

Claudia Simon Paul Hastings LLP

San Diego, CA

James Sullivan Alston & Bird LLP

New York, NY

Steven Tonsfeldt O’Melveny & Myers LLP

Menlo Park, CA

DISCLAIMERS

The findings presented in this Study do not necessarily reflect the personal views of the Working Group members or the views of their respective firms. In addition, the acquisition agreement provisions that form the basis of this Study are drafted in many different ways and do not always fit precisely into particular “data point” categories. Therefore, Working Group members have had to make various judgment calls regarding, for example, how to categorize the nature or effect of the provisions. As a result, the conclusions presented in this Study may be subject to important qualifications that are not expressly articulated in this Study.


Release #2: 17Jan12

Jennifer Becker Hirscher Fleischer

Richmond, VA

Kevin BoardmanPatton Boggs LLP

Dallas, TX

Abigail BombaFried, Frank, Harris, Shriver & Jacobson LLP

New York, NY

Richard Brody Troutman Sanders LLP

Atlanta, GA

Nick Claassen Brownstein Hyatt Farber Schreck, LLP

Denver, CO

Jay Cohen Duane Morris LLP

Baltimore, MD

John Corrigan John F. Corrigan, P.C.

Providence, RI

Edward Deibert Arnold & Porter

San Francisco, CA

Robert Dickey Morgan, Lewis & Bockius LLP

New York, NY

Dan Espinoza Cooley LLP

Palo Alto, CA

Josh Gaul K&L Gates LLP

Seattle, WA

Ted George Chaffe McCall LLP New Orleans, LA

Greg Giammittorio Morrison & Foerster LLP

McLean, VA

Lisa Hedrick Hirscher Fleischer

Richmond, VA

Patrick Henderson Shook, Hardy & Bacon, L.L.P.

Kansas City, MO

Troy Hickman Perkins Coie LLP

Seattle, WA

Michael Hollingsworth Nelson Mullins Riley & Scarborough LLP

Atlanta, GA

Woody Jones Andrews Kurth LLP

Houston, TX

Barbara Kaye Honigman Miller Schwartz and Cohn LLP

Ann Arbor, MI

Robert Kim Ballard Spahr LLP

Las Vegas, NV

Kevin Kyte Stikeman Elliott LLP

Montreal, Canada

Brian Lenihan Choate Hall & Stewart LLP

Boston, MA

Cindy Lin Andrews Kurth LLP

Houston, TX

Christine Liu O’Melveny & Myers LLP

Menlo Park, CA



Release #2: 17Jan12

Samuel Mullin Robinson & Cole LLP

Boston, MA

Naomi Ogan K&L Gates LLP

Seattle, WA

Cliff Pearl Polsinelli Shughart LLP

Denver, CO

Chris Pesch Polsinelli Shughart

Chicago, IL

Chris Phillips Waller Lansden Dortch & Davis LLP

Nashville, TN

Michael Phillips Davis Wright Tremaine LLP

Portland, OR

Thomas Queen Graves Dougherty Hearon & Moody

Austin, TX

Jim Scheinkman Snell & Wilmer L.L.P. Orange County, CA

Chris Scheurer McGuireWoods LLP

Charlotte, NC

Mark Seneca Orrick Herrington & Sutcliffe LLP

Menlo Park, CA

Tyler J. Sewell Morrison & Foerster LLP

Denver, CO

Ryan Spiers Cooley LLP

Palo Alto, CA

John E. Stoddard III Drinker Biddle & Reath LLP

Princeton, NJ

Mark Stoneman Armstrong Teasdale LLP

St. Louis, MO

Ben Straughan Perkins Coie LLP

Seattle, WA

Jay Sullivan Goodwin Procter LLP

Boston, MA

Kevin Sullivan Weil, Gotshal & Manges LLP

Boston, MA

Brett Thorstad Weil, Gotshal & Manges LLP

Dallas, TX

Jeff Vincent Grey Mountain Partners

Boulder, CO

Samuel Wales McDermott Will & Emery

Chicago, IL

Isabella Wezdecki Johnson & Johnson

New York, NY

Rhys Wilson Nelson Mullins Riley & Scarborough LLP

Atlanta, GA

Iain Wood Haynes and Boone LLP

Dallas, TX

Tina Woodside Gowling Lafleur Henderson LLP

Toronto, Canada

Matt Zmigrosky Haynes and Boone LLP

Dallas, TX



Release #2: 17Jan12

This Study analyzes publicly available acquisition agreements for transactions completed in 2010 that involved private targets being acquired by public companies. The previous studies published in 2009 and 2007 analyzed such agreements for transactions completed in 2008 and 2006, respectively.

The final Study sample of 100 acquisition agreements excludes agreements for transactions in which the target was in bankruptcy, reverse mergers, and transactions otherwise deemed inappropriate for inclusion. Asset deals comprised 17% of the Study sample.

30%70%100$25M - $960M

Simultaneous Sign-and-CloseDeferred

Closing# of Deals

Transaction Value* Range

* For purposes of this Study, it is assumed that transaction value as determined by Westlaw Business is equal to “Purchase Price”as that term is used in the underlying acquisition agreements.

2011 Private Target Study Sample Overview2011 Private Target Study Sample Overview


Release #2: 17Jan12

Over $500M10.0%

$401M - $500M1.0% $301M - $400M

6.0%

$201M - $300M14.0%

$25M - $50M28.0%

$101M - $200M16.0%

$51M - $100M25.0%

2011 Private Target Study Sample Overview2011 Private Target Study Sample Overview(by transaction value)*(by transaction value)*

* For the Study sample, the average transaction value was $175.99 million and the median transaction value was $90 million. Excludes uncapped earnouts and assumption of debt.


Release #2: 17Jan12

Other8%

Retail1%

Financial Services5%

Industrial Goods & Services

10%

Health Care16%

Media2%

Telecom7%

Technology29%

Aerospace & Defense5%

Personal & Household Goods

8%

Food & Beverage3%

Oil & Gas3%

Construction & Materials

3%

2011 Private Target Study Sample Overview2011 Private Target Study Sample Overview(by industry)(by industry)


Release #2: 17Jan12

Financial45%

Corporate8%

Entrepreneurial47%

2011 Private Target Study Sample Overview2011 Private Target Study Sample Overview(by nature of principal sellers)(by nature of principal sellers)

Entrepreneurial: founders appear to dominate management/ownershipCorporate: founders appear not to dominate management/ownership (other than “Financial”)Financial: backed by financial sponsors (including VCs) who appear to have significant influence/control

(27% in deals in 2008)(34% in deals in 2006*)



* Approximately 1% of deals in 2006 were indeterminable.


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I. Financial Provisions…………………………………………………………………………………………..Slide 11A. Post-Closing Purchase Price Adjustments…………………………………………………………………………………Slide 12B. Earnouts ………………………………………………………………………………………………………………………Slide 20

II. Pervasive Qualifiers ………………………………………………………………………………………….Slide 25A. Material Adverse Effect (“MAE”) ……………………………………………………………………………………………Slide 26B. Knowledge ……………………………………………………………………………………………………………………Slide 40

III. Target’s Representations, Warranties, and Covenants ……………………………………………….Slide 43A. Financial Statements …………………………………………………………………………………………………………Slide 44B. “No Undisclosed Liabilities” …………………………………………………………………………………………………Slide 46C. Compliance with Law ………………………………………………………………………………………………………Slide 48D. “10b-5”/Full Disclosure Representation ……………………………………………………………………………………Slide 50E. Covenants ……………………………………………………………………………………………………………………Slide 52

IV. Conditions to Closing………….………….………………………………………………………………….Slide 57A. Accuracy of Target’s Representations ……………………………………………………………………………………Slide 58B. Buyer’s MAC Condition ………………………………………………………………………………………………………Slide 66C. No Legal Proceedings Challenging the Transaction………………………………………………………………………Slide 68D. Legal Opinions ………………………………………………………………………………………………………………Slide 71E. Appraisal Rights ………………………………………………………………………………………………………………Slide 72

V. Indemnification …….………….………………………………………………………………………………Slide 74 A. “Sandbagging”…………………………………………………………………………………………………………………Slide 75B. “No Other Representations and Warranties”/Non-Reliance………………………………………………………………Slide 79C. Non-Reliance, “Sandbagging,” and “10b-5” Representation Correlations………………………………………………Slide 82D. Survival/Time to Assert Claims ……………………………………………………………………………………………Slide 85E. Types of Damages/Losses Covered ………………………………………………………………………………………Slide 88F. Baskets ………………………………………………………………………………………………………………………Slide 90G. Eligible Claim Threshold ……………………………………………………………………………………………………Slide 96H. “Double Materiality” Scrape ………………………………………………………………………………………………Slide 98I. Caps …………………………………………………………………………………………………………………………Slide 100J. Indemnification as Exclusive Remedy ……………………………………………………………………………………Slide 103K. Escrows/Holdbacks …………………………………………………………………………………………………………Slide 105L. Stand-Alone Indemnities ……………………………………………………………………………………………………Slide 108M. Reductions Against Buyer’s Indemnification Claims ……………………………………………………………………Slide 109

VI. Dispute Resolution ……………….………………………………………………………………………..Slide 110A. Waiver of Jury Trial …………………………………………………………………………………………………………Slide 111B. Alternative Dispute Resolution ……………………………………………………………………………………………Slide 112C. Post-Closing Representation of Shareholders……………………………………………………………………………Slide 114

ContentsContents


Release #2: 17Jan12

Financial Provisions


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PostPost--Closing Purchase Price AdjustmentsClosing Purchase Price Adjustments


The “Adjustment Amount” (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Working Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer by Buyer to an account specified by Seller.

…

“Working Capital” as of a given date shall mean the amount calculated by subtracting the current liabilities of Seller… as of that date from the current assets of Seller… as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the “Initial Working Capital”) was ______ dollars ($______).

(ABA Model Asset Purchase Agreement)


Release #2: 17Jan12

Includes Adjustment

Provision82%

No Adjustment

Provision18%

PostPost--Closing Purchase Price Adjustments*Closing Purchase Price Adjustments*


(Subset: includes adjustment)

23%

23%

2%

28%

79%

0%

Other

Cash

Assets

Debt

Working Capital

Earnings

Adjustment Metrics**

** 42% of the post-closing purchase price adjustments were based on more than one metric.

(79% in deals in 2008)(68% in deals in 2006)

* Excludes one deal with two closings.

Deals in 2010

Deals in 2008


Release #2: 17Jan12


Yes32%

No68%

No15%

Yes85%

PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––Estimated Payments at ClosingEstimated Payments at Closing

(Subset: includes estimated closing payment)

(Subset: deals with post-closing purchase price adjustment)



Includes Payment at Closing Based on Target’s Estimate?

Does Buyer Have Express Right to Approve Estimated Payment Amount?


Release #2: 17Jan12


PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––Working Capital Excludes TaxWorking Capital Excludes Tax--Related ItemsRelated Items

“Adjusted Working Capital” means current assets minus current liabilities; provided, however, that “Adjusted Working Capital”excludes from current assets all tax assets and excludes from current liabilities all tax liabilities.


Release #2: 17Jan12

PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––Working Capital Excludes TaxWorking Capital Excludes Tax--Related ItemsRelated Items


Tax-Related Items Excluded From

Calculation20%

Tax-Related Items Not Excluded From

Calculation55%

Indeterminable*25%

(Subset: deals with working capital purchase price adjustment)


(15% in deals in 2008)

* Includes deals where provisions relating to working capital were contained in unfiled exhibits or schedules.


Release #2: 17Jan12

PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––Preparation of Closing Balance SheetPreparation of Closing Balance Sheet

Seller9%

Other4%Buyer

86%

Indeterminable1%

Silent4%

GAAP14%

Other*41%

GAAP Consistent with Past Practices

42%

Methodology*Preparing Party




(5% in deals in 2008)(7% in deals in 2006)(83% in deals in 2008)


* Percentages total 101% due to rounding.** Other commonly used methodology was GAAP as modified in the language of the agreement, or by the principles and

changes set forth on a schedule.





*


Release #2: 17Jan12

Includes Separate Escrow35%

No Separate Escrow65%

N/A (No Indemnity Escrow/

Holdback)26%

Payment Not from

Indemnity Escrow26%

True-Up Payment from

Indemnity Escrow44%

Silent4%

PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––Separate EscrowSeparate Escrow

(Subset: no separate escrow*)




* Prior data omitted, as the previous Study omitted deals with no indemnity escrow/holdback from this calculation.


Release #2: 17Jan12


PostPost--Closing Purchase Price Adjustments Closing Purchase Price Adjustments ––ThresholdThreshold


Purchase Price Adjustment Paid Only if Exceeds

Threshold16%

Purchase Price Adjustment

Amount Need Not Exceed a Threshold

84%(15% in deals in 2008)


Release #2: 17Jan12

No Earnout62%

Includes Earnout

38%

11%

26%

5%

32%

37%Revenue

Earnings/EBITDA

Combination ofAbove

Other**

Indeterminable

Earnouts*Earnouts*

(Subset: includes earnout)

Earnout Metrics

* Excludes one deal with two closings.** Examples: gross margin; meeting certain thresholds under third-party contracts; achievement of sales quotas.




Release #2: 17Jan12

6%

6%

24%

9%

12%

18%

18%

9%<12 months

12 months

>12 to <24 months

24 months

>24 to <36 months

36 months

>36 to <60 months

60 months

Earnouts Earnouts ––Period of EarnoutPeriod of Earnout(Subset: deals with earnouts*)


* Excludes 4 deals where provisions relating to period of the earnout were redacted or included in unfiled agreements or schedulesand one deal with two closings. 2010 percentages total 102% due to rounding.


Release #2: 17Jan12

Not Included59%

Indeterminable14%

Included27%

(Subset: deals with earnouts*)


Included8%

Indeterminable14%

Not Included78%

Earnouts Earnouts ––BuyerBuyer’’s Covenants as to Acquired Businesss Covenants as to Acquired Business

(29% in deals in 2008)(22% in deals in 2006) (10% in deals in 2008)


Covenant to Run Business Consistent with Past Practice

Covenant to Run Business to Maximize Earnout



Release #2: 17Jan12

Indeterminable8%

Silent24%

Express No5%

Express Yes62%

Earnouts Earnouts ––Acceleration and OffsetsAcceleration and Offsets

Yes35%

No60%

Indeterminable5%





Does the Earnout Expressly Accelerate on a Change of Control?

Can Buyer Offset Indemnity Payments Against Earnout?**

(54% in deals in 2008)(85% in deals in 2006) (58% in deals in 2008) (10% in deals in 2008)



* Excludes one deal with two closings.** Percentages total 99% due to rounding.


Release #2: 17Jan12

Includes Express Disclaimer of

Fiduciary Relationship with

Respect to Earnout

3%

Indeterminable11%

Express Disclaimer of Fiduciary

Relationship Not Included

86%



Earnouts Earnouts ––Express Disclaimer of Fiduciary RelationshipExpress Disclaimer of Fiduciary Relationship






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Pervasive Qualifiers


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Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect””


“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.


Release #2: 17Jan12

* Excludes two agreements for which the applicable provisions were included on an unfiled schedule.

MAE Defined*97%

MAE Not Defined2%

MAE Not Included

1%

"Prospects" Not Included

84%

"Prospects" Included

16%

(Subset: MAE defined)






Release #2: 17Jan12


“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Forward Looking StandardsForward Looking Standards


Release #2: 17Jan12

MAE is Forward Looking**

97%

MAE is Not Forward Looking

3%


(Subset: deals with MAE definition)

* Because many agreements use multiple forward looking standards (e.g., “would be” or “could be”), often without a discernible consistency regarding the use of each standard, data as to the prevalence of various forward looking standards is omitted.

** Includes both deals where the MAE definition included forward looking language and deals where the MAE definition did not include forward looking language but forward looking language was predominantly used in conjunction with the use of the defined term in the body of the agreement.

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Forward Looking Standards*Forward Looking Standards*



Release #2: 17Jan12

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––BuyerBuyer’’s Ability to Operate Targets Ability to Operate Target’’s Business Post Closings Business Post Closing

TargetTarget’’s Ability to Consummate Contemplated Transactions Ability to Consummate Contemplated Transaction


“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that is or could reasonably be expected to have a materially adverse effect on (i) the business, assets, liabilities, capitalization, condition (financial or other), or results of operations of Target, (ii) Seller’s ability to consummate the transactions contemplated hereby, or (iii) Buyer’s ability to operate the business of Target immediately after Closing in the manner operated by Seller before Closing.


Release #2: 17Jan12

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Includes Reference to Specific Dollar Amount ThresholdIncludes Reference to Specific Dollar Amount Threshold


“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that is or could reasonably be expected to (a) be materially adverse to (i) the business, assets, properties, condition (financial or otherwise), or results of operations of the Target and its subsidiaries, taken as a whole, or (ii) the ability of the Target to perform its obligations under this Agreement or (b) result in losses to the Target and its subsidiaries, taken as a whole, in an aggregate amount equal to or exceeding $4,500,000.00.


Release #2: 17Jan12

No45%

Yes55%


Includes Target’s Ability to Consummate Contemplated Transaction


Includes Reference to Specific Dollar Amount Threshold

Yes8%

No92%


Yes3%

No97%

Includes Buyer’s Ability to Operate Target’s Business Post Closing



(Subset: deals with MAE definition)


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Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Carve OutsCarve Outs


“Material Adverse Effect” means…, except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions.


Release #2: 17Jan12

No Carve Outs Included

13%

Definition Includes Carve Outs

87%




(Subset: deals with MAE definition*)

* Excludes two agreements for which the applicable provisions were included on an unfiled schedule and one deal where carve outs were subject to confidential treatment.


Release #2: 17Jan12



82%

79%

68%

94%

82%

78%

82%

60%Actions Required by Agreement

Announcement of Deal

Changes in Accounting

Changes in Law

Economic Conditions

Financial Market Downturn

Industry Conditions

War or Terrorism

Deals in 2010

Deals in 2008

Deals in 2006

(Subset: deals with MAE definition with carve outs*)

* Excludes two agreements for which the applicable provisions were included on an unfiled schedule and one deal where carve outs were subject to confidential treatment.


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Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Carve Out(s) Qualified by Disproportionate EffectCarve Out(s) Qualified by Disproportionate Effect


“Material Adverse Effect” means…, except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions (provided that such event, change, or action does not affect Company in a substantially disproportionate manner).


Release #2: 17Jan12

At Least One Carve Out Qualified by

Disproportionate Effect80%

No Carve Outs Qualified by

Disproportionate Effect20%


Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Carve Out(s) Qualified by Disproportionate EffectCarve Out(s) Qualified by Disproportionate Effect


(Subset: deals with MAE definition with carve outs*)

** Excludes two agreements for which the applicable provisions were included on an unfiled schedule and one deal where carve outs were subject to confidential treatment.


Release #2: 17Jan12


“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that is or could reasonably be expected to have a materially adverse effect on (i) the business, assets, liabilities, capitalization, condition (financial or other), or results of operations of Target or any of its Subsidiaries, or (ii) Seller’s ability to consummate the transactions contemplated hereby.

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Application to Individual SubsidiariesApplication to Individual Subsidiaries


Release #2: 17Jan12

MAE Applies to Target or

Subsidiaries Individually

3%

Silent13%

MAE Applies to Target and Subsidiaries

Together Only84%

Definition of Definition of ““Material Adverse EffectMaterial Adverse Effect”” ––Application to Individual SubsidiariesApplication to Individual Subsidiaries


(Subset: deals with MAE definition*)

* Excludes 30 deals where the target had no subsidiaries and two agreements for which the applicable provisions were included on an unfiled schedule.





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Knowledge Knowledge ––Standards Standards

Actual Knowledge

“Knowledge" means the actual knowledge of the directors and officers of Target.

Constructive Knowledge (Role-Based Deemed Knowledge)

“Knowledge of the Target” means the actual knowledge of the Chief Executive Officer, the President and the Chief Financial Officer of Target and the knowledge that each such person would reasonably be expected to obtain in the course of diligently performing his or her duties for the Target.


Release #2: 17Jan12

Knowledge Knowledge ––Standards*Standards*


Actual Knowledge**

23%

Knowledge Not Defined

4%

Constructive Knowledge**

73%

* Excludes one agreement for which the applicable provisions were included on an unfiled schedule.** Includes one agreement with both actual knowledge and constructive knowledge provisions. *** 4% include more than one constructive knowledge element, e.g., role-based deemed knowledge and an express investigation

requirement.


5%

12%

16%

71%

Other

Role-Based DeemedKnowledge

Express Investigation -Other

Express Investigation -Reasonable or Due

Inquiry

(Subset: constructive knowledge***)

Deals in 2010

Deals in 2008


Release #2: 17Jan12

Identified Persons Included

93%

No Identified Person

7%

Knowledge Knowledge ––Whose Knowledge is Imputed to Target?*Whose Knowledge is Imputed to Target?*



* Excludes one agreement for which the applicable provisions were included on an unfiled schedule.


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Target’s Representations, Warranties, and Covenants


Release #2: 17Jan12

“Fairly presents” is GAAP qualified

The financial statements fairly present (and the financial statements delivered pursuant to Section 5.8 will fairly present) the financial condition and the results of operations, changes in shareholders’ equity and cash flows of [Target] as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP.


“Fairly presents” is not GAAP qualified

The Financial Statements (i) fairly present the consolidated financial condition and the results of operations, changes in shareholders’ equity, and cash flows of the Company and its Subsidiaries as at the respective dates of, and for the periods referred to in, the Financial Statements, and (ii) were prepared in accordance with GAAP, subject, in the case of the Unaudited Financial Statements, to normal recurring year-end adjustments.

(ABA Model Stock Purchase Agreement, Second Edition)

Financial Statements Financial Statements ––““Fair PresentationFair Presentation”” RepresentationRepresentation



Release #2: 17Jan12

Rep Not Included

23%

"Fair Presentation" Rep Included

77%

(Subset: “Fair Presentation” Rep Included)


Financial Statements Financial Statements ––““Fair PresentationFair Presentation”” RepresentationRepresentation

"Fair Presentation" Rep is GAAP

Qualified24%

Not GAAP Qualified

76%


Release #2: 17Jan12

Buyer-Favorable Formulation

Target has no liability except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Target’s ordinary course of business since the date of the Interim Balance Sheet.

Target-Favorable Formulation

Target has no liability of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP except for…

““No Undisclosed LiabilitiesNo Undisclosed Liabilities”” RepresentationRepresentation



Release #2: 17Jan12

““No Undisclosed LiabilitiesNo Undisclosed Liabilities”” RepresentationRepresentation

Includes Rep96%

Rep Not Included

4%

"All Liabilities" (Buyer

Favorable)61%

"GAAP Liabilities"

(Target Favorable)

39%




(Subset: includes rep)

Knowledge Qualified

6%

Not Knowledge

Qualified94%



Release #2: 17Jan12

[To the Sellers’ knowledge,] the business of Target [has been and] is being conducted in compliance with all applicable laws.

Compliance with Law RepresentationCompliance with Law Representation



Release #2: 17Jan12

77%59%

73%

32%

18%23%

76%71%

73%

10%18%

6% Knowledge Qualified

Covers Present ANDPast Compliance

Includes Notice ofInvestigation*

Includes Notice ofViolation

Compliance with Law RepresentationCompliance with Law Representation

Deals in 2010

Deals in 2008

Includes Compliance

with Law Rep99%

Not Included1%

(Subset: includes rep)


* Does not test whether notice of investigation requirement appears in other representations.

(100% in deals in 2008)

Deals in 2006


Release #2: 17Jan12

“10b-5” Formulation

No representation or warranty or other statement made by [Target] in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to Section 2.7(a) or otherwise in connection with the Contemplated Transactions contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.

Full disclosure Formulation

Seller does not have Knowledge of any fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Letter.


““10b10b--55””/Full Disclosure Representation/Full Disclosure Representation



Release #2: 17Jan12

"10b-5" AND Full Disclosure

Formulation4%

Full Disclosure Formulation

Only2%

Rep Not Included

63%

"10b-5" Formulation

Only31%

Knowledge Qualified

23%

Not Knowledge Qualified

77%

““10b10b--55””/Full Disclosure Representation/Full Disclosure Representation



(Subset: “10b-5” formulation only)






Release #2: 17Jan12

Yes46%

No54%

UpdatesRequired

14%

Updates Permitted

23%

Silent57%

Updates Expressly Prohibited

6%

Covenants Covenants –– Updating of Disclosure Schedules Before Updating of Disclosure Schedules Before Closing*Closing*

Pre-Signing Information

Only 0%

Both Pre-Signing and Post-Signing Information

58%

Post-Signing Information

Only42%

(Subset: updates Permitted or Required)

Is Buyer’s Right to Indemnification Limited for Updated Matters?**

* Includes deferred closing deals only. ** Prior data regarding express duty to update omitted as the 2011 Study takes a more nuanced approach by including provisions

that permit Target to update schedules in addition to provisions that require Target to update schedules.


What Information Can/Must Be Updated?**

}


Release #2: 17Jan12

Target Expressly Required to Notify

Buyer of Breaches**

66%

Target Not Expressly Required to Notify Buyer of

Breaches34%

Covenants Covenants –– Notice of Breaches of Representations, Notice of Breaches of Representations, Warranties, and Covenants*Warranties, and Covenants*


* Includes deferred closing deals only.** Includes two agreements that require Target to notify Buyer of breaches that could have a material adverse effect.



Release #2: 17Jan12

Covenants Covenants –– Operation in the Ordinary Course*Operation in the Ordinary Course*

Not Included6%

Includes Covenant to Operate in Ordinary Course94%

(Subset: includes Ordinary Course Covenant)

* Includes deferred closing deals only. ** Includes one deal that effectively included two covenants to operate in the ordinary course, only one of which was so qualified

by past practice.


Not Qualified 83%

Qualified by An "Efforts" Standard

17%

Qualified by "Consistent

with Past Practice"**

86%

Not Qualified14%

Is Covenant Qualified?


Release #2: 17Jan12

Between the date of this Agreement and the earlier of the Closing and the termination of this Agreement, Target shall not, and shall take all action necessary to ensure that none of Target’s Representatives shall (i) solicit, initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition Proposal or (ii) participate in any discussions, conversations, negotiations or other communicationsregarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.

Covenants Covenants –– No Shop/No TalkNo Shop/No Talk



Release #2: 17Jan12

Not Included17%

Includes No Shop/No Talk

Provisions83%

Includes Fiduciary

Exception12%

No Fiduciary Exception

51%

Deal Structured as Direct Stock

Purchase37%

(Subset: includes No Shop/No Talk)



Covenants Covenants –– No Shop/No Talk*No Shop/No Talk*

* Includes deferred closing deals only; disregards one deal with a redacted “No Solicitation” covenant.


Release #2: 17Jan12

Conditions to Closing*

* Includes deferred closing deals only.


Release #2: 17Jan12

Conditions to Closing

Single point in time: at closing

Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.

Two points in time: at signing and at closing

Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the date of this Agreement, andshall be accurate in all respects as of the Closing Date as if made on the Closing Date.

Accuracy of TargetAccuracy of Target’’s Representations s Representations ––WhenWhen Must They Be Accurate?Must They Be Accurate?


Release #2: 17Jan12

At Signing and Closing59%

At Closing Only41%



Accuracy of TargetAccuracy of Target’’s Representations s Representations ––WhenWhen Must They Be Accurate?Must They Be Accurate?


Release #2: 17Jan12

Accurate in all respects

Each of the representations and warranties made by Target in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.

Accurate in all material respects

Each of the representations and warranties made by Target in this Agreement shall have been accurate in all material respects as of the Closing Date as if made on the Closing Date.

MAE qualification

Each of the representations and warranties made by Target in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have aMaterial Adverse Effect.

Accuracy of TargetAccuracy of Target’’s Representations s Representations ––HowHow Accurate Must They Be?Accurate Must They Be?



Release #2: 17Jan12

“When Made”(i.e., at signing)

* Includes deals with both “when made” and “bring down” requirements and deals solely with a “bring down” requirement.** Includes both deals where specific reps are carved out of general standard and deals that use a formulation such as

“representations and warranties that are qualified by materiality must be accurate in all respects and all other representations and warranties must be accurate in all material respects.”

“Bring Down”(i.e., at closing)*


(inclusion of materiality qualifiers)(inclusion of materiality qualifiers)

"In all respects"

12%

MAE29%"In all

material respects"**

59%

"In all material

respects"**48%

MAE49%

"In all respects"

3%



Release #2: 17Jan12

The representation and warranty set forth in Section 3.3 (Capitalization) shall be accurate in all [material] respects as of the Closing Date as if made on the Closing Date. Each of the other representations and warranties made by Target in this Agreement shall be accurate as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have aMaterial Adverse Effect.

Accuracy of TargetAccuracy of Target’’s Representations s Representations ––HowHow Accurate Must They Be?Accurate Must They Be?(MAE qualifier with capitalization carve out)(MAE qualifier with capitalization carve out)



Release #2: 17Jan12

(Subset: deals with MAE qualifiers*)

Includes Capitalization Rep Carve Out

61%

Not Included39%

Not Included36%

Includes Capitalization Rep Carve Out

64%


** Includes deals with both “when made” and “bring down” requirements and deals solely with a “bring down” requirement.

Accuracy of TargetAccuracy of Target’’s Representations s Representations ––HowHow Accurate Must They Be?Accurate Must They Be?(MAE qualifier with capitalization carve out)(MAE qualifier with capitalization carve out)


“Bring Down”(i.e., at closing)**


* Excludes one deal in which “fundamental representations” are defined in a non-public annex.



Release #2: 17Jan12

Each of the representations and warranties made by Target in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not constitute and could not reasonably be expected to have a Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties, all “Material Adverse Effect” qualifications and other materiality qualifications and similar qualifications contained in such representations and warranties shall be disregarded).


((““double materialitydouble materiality”” scrape)scrape)



Release #2: 17Jan12

Includes "Double Materiality"

Scrape78%

Silent22%


Scrape77%

Silent23%



“Bring Down”(i.e., at closing)**


((““double materialitydouble materiality”” scrape)*scrape)*

* Includes deals that use a formulation such as “representations and warranties that are qualified by materiality must be true in all respects and all other representations and warranties must be true in all material respects.”

** Includes deals with both “when made” and “bring down” requirements and deals solely with a “bring down” requirement.



(Subset: deals with materiality/MAE qualifiers)


Release #2: 17Jan12

Stand-Alone:

Since the date of this Agreement, there has not been any Target Material Adverse Change.

“Back-Door”:

“absence of changes” representation

Since the Balance Sheet Date, there has not been any Target Material Adverse Change.

plus “bring down” formulation of “accuracy of representations” condition

BuyerBuyer’’s MAC Conditions MAC Condition



Release #2: 17Jan12

Back Door MAC Condition Only

17%

Both 53%

Stand-Alone MAC Condition Only

23%

Neither7%

BuyerBuyer’’s MAC Condition s MAC Condition







Release #2: 17Jan12


No Legal Proceedings Challenging the TransactionNo Legal Proceedings Challenging the Transaction

There will not be pending [or threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or third party] challenging or seeking to restrain or prohibit the consummation of the Transactions.


Release #2: 17Jan12


Condition Not Included

31%

Includes Condition

69%

(Subset: includes condition)



A ny Legal Proceeding

67%

Governmental Legal Proceedings Only

33%(18% in deals in 2008)



Release #2: 17Jan12


Pending Proceedings Only

44%

Pending and Threatened Proceedings

56%

(Subset: deals with closing condition of no legal proceedings challenging the transaction)




Release #2: 17Jan12

Required*27%Not Required**

73%

Legal Opinions (NonLegal Opinions (Non--Tax) of TargetTax) of Target’’s Counsels Counsel

(All deals: includes simultaneous sign-and-close deals)

* Typically as a condition to closing, but includes opinions required in a “closing deliveries” covenant.** Does not account for opinions that may have been required or delivered outside of the express terms of the agreement.




Release #2: 17Jan12

Appraisal Rights Not Available:

As of the Closing, Eligible Dissenting Shares, or shares that may become Eligible Dissenting Shares, shall represent not more than [10]% of the total voting power of the outstanding shares of Company’s capital stock on such date, where “Eligible Dissenting Shares” means shares of Company’s common stock or preferred stock for which the holders have either demanded or perfected appraisal rights in accordance with Section 262 of the DGCL and have not effectively withdrawn or lost such appraisal rights.

Appraisal RightsAppraisal Rights


Appraisal Rights Not Exercised (or Perfected):

Stockholders owning beneficially or of record no more than [5]% of the outstanding shares of Company’s common stock will have perfected their right of appraisal pursuant to the DGCL, and 20 days will have elapsed since the date of mailing notification of the Company Stockholders’ Consent to each of the Stockholders who have not executed a Company Stockholders’ Consent.


Release #2: 17Jan12

Appraisal Rights*Appraisal Rights*

Includes A ppraisal

R ights C o ndit io n

56%

C o ndit io n N o t Included

44%


* Represents only merger deals.


(Subset: includes condition)Appraisal Rights Not Available to

Specified Percentage of

Holders37%

Appraisal Rights Not Exercised by

Specified Percentage of

Holders63%



Release #2: 17Jan12

Indemnification*

* Disregards 4 transactions with redacted indemnification provisions and 1 transaction with no indemnification provisions.


Release #2: 17Jan12

““SandbaggingSandbagging””((propro--sandbagging)sandbagging)

The right to indemnification, payment, reimbursement, or other remedy based upon any such representation, warrant, covenant, or obligation will not be affected by… any investigation conducted or any Knowledge acquired at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of, or compliance with, such representation, warranty, covenant, or obligation.

(ABA Model Stock Purchase Agreement, Second Edition)

Indemnification


Release #2: 17Jan12

““SandbaggingSandbagging””((antianti--sandbagging provision)sandbagging provision)

No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such Breach before Closing.

Indemnification


Release #2: 17Jan12

Anti-Sandbagging Provision Included

5%

Silent54%

Pro-Sandbagging Provision Included*

41%

““SandbaggingSandbagging””




* Includes one deal with a hybrid provision that prohibits sandbagging only with respect to certain information prepared at the request of Buyer, but that otherwise allows for sandbagging. For purposes of this Study “pro-sandbagging” is defined by excluding clauses that merely state, for example, that Target’s representations and warranties “survive Buyer’s investigation”unless they include an express statement on the impact of Buyer’s knowledge on Buyer’s post-closing indemnification rights.

Indemnification


Release #2: 17Jan12

““SandbaggingSandbagging”” –– Scope of ProScope of Pro--Sandbagging ProvisionsSandbagging Provisions(Subset: deals with pro-sandbagging provisions)

Indemnification

12%

41%

0%

59%Indemnification RightsOnly

Walk Rights Only

Indemnification and WalkRights

Other*

* E.g., “any other remedy based on representations, warranties, covenants, and agreements in this Agreement.”


Release #2: 17Jan12

““No Other Representations and WarrantiesNo Other Representations and Warranties””

Except for the representations and warranties contained in [Target’s representations and warranties] (including the related portions of the Disclosure Schedules), none of Seller, the Target or any other Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller or the Target.

Indemnification


Release #2: 17Jan12

““No Other Representations and WarrantiesNo Other Representations and Warranties””/Non/Non--RelianceReliance

Buyer acknowledges that Target has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in Section 3, and that it is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties in Section 3.

Indemnification


Release #2: 17Jan12

Only Non-Reliance Clause Included*

8%

Only "No Other Representations" Clause Included*

39%

Both "No Other Representations" and Non-Reliance Clause Included*

25%

Neither Clause Included

28%(55% in deals in 2008)



Indemnification

* Includes 5 deals with fraud carve outs to “no other representations” clause and 2 deals with fraud carve outs to express non-reliance clause.


““No Other Representations and WarrantiesNo Other Representations and Warranties””/Non/Non--RelianceReliance


Release #2: 17Jan12

Provision Not Included

61%

Includes Pro-Sandbagging

39%

NonNon--Reliance and Reliance and ““SandbaggingSandbagging”” –– CorrelationCorrelation

"No Other Representations" or Express Non-

Reliance Provision Included

71% Pro-Sandbagging

Provision Included

41%


32%

"No Other Represen-tations" or

Express Non-Reliance Provision Included

68%

(Subset: includes pro-sandbagging provision)

(Subset: includes non-reliance provision)

Indemnification




Release #2: 17Jan12

Includes "10b-5Representation

31%

Rep Not Included

69%

NonNon--Reliance and Reliance and ““10b10b--55”” Representation* Representation* –– CorrelationCorrelation

Includes "10b-5" Representation

37%


41%



59%

(Subset: includes “10b-5” Representation)(Subset: includes non-reliance provision)

Indemnification



71%

* Includes both “10b-5” and “full disclosure” formulations.




Release #2: 17Jan12


49%Includes Pro-Sandbagging

Provision51%

““SandbaggingSandbagging”” and and ““10b10b--55”” Representation* Representation* –– CorrelationCorrelation

Pro-Sandbagging

Provision Included

41%

(Subset: includes pro-sandbagging provision)

(Subset: includes “10b-5” representation)

Includes "10b-5"

Representation37%

Rep Not Included

54%

Includes "10b-5" Rep

46%

Indemnification

* Includes both “10b-5” and “full disclosure” formulations.




Release #2: 17Jan12

Indemnification

Survival/Time to Assert ClaimsSurvival/Time to Assert Claims

11.1 SURVIVAL…

All representations, warranties, covenants, and obligations in this Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, and any certificate, document, or other writing delivered pursuant to this Agreement will survive the Closing and the consummation and performance of the Contemplated Transactions.

11.5 TIME LIMITATIONS

If the Closing occurs, Sellers shall have liability under Section 11.2(a) with respect to any Breach of a representation or warranty (other than those in Sections . . ., as to which a claim may be made at any time), only if on or before the date that is ___ years after the Closing Date, Buyer notifies [Target’s representative] of a claim, specifying the factual basis of the claim in reasonable detail to the extent known by Buyer.

(ABA Model Stock Purchase Agreement , Second Edition)


Release #2: 17Jan12

4%

12%

2%

34%

14%

25%

0%

2%

1%

1%

3%Silent

Express No Survival

< 6 months**

6 months

> 7 to < 12 months

12 months

> 12 to < 18 months

18 months

> 18 to < 24 months

24 months

> 24 months

Survival/Time to Assert Claims Survival/Time to Assert Claims (generally*)(generally*)

Indemnification

Deals in 2010

Deals in 2008

Deals in 2006

* These periods apply to most representations and warranties; Certain representations and warranties may be carved out from these periods in order to survive for other specified periods.

** Data not analyzed for prior years.


Release #2: 17Jan12

77%

82%

25%

72%

45%

20%

13%

36%

33%

53%

74%

61%

38%B ro ker's/ F inder's F ees (R ep)

C apita lizat io n (R ep)

D ue A utho rity (R ep)

D ue Organizat io n (R ep)

Emplo yee B enef its / ER ISA (R ep)

Enviro nmental (R ep)

Intellectual P ro perty (R ep)

N o C o nflicts (R ep)

Ownership o f Shares (R ep)

T axes (R ep)

T it le to / Suff ic iency o f A ssets (R ep)

F raud

B reach o f Seller's / T arget 's C o venants

Survival/Time to Assert Claims Survival/Time to Assert Claims ––Carve Outs to Survival Limitations*Carve Outs to Survival Limitations*

* Matters subject to carve outs typically survive longer than time periods generally applicable to representations. Only those categories appearing more than 10% of the time for deals in 2010 are shown.

(Subset: deals with survival provisions*)

Indemnification

Deals in 2010

Deals in 2008

Deals in 2006


Release #2: 17Jan12

Yes0%

No100%

Types of Damages/Losses CoveredTypes of Damages/Losses Covered

Expressly Excluded

17%

Silent70%

Expressly Included

13%

Diminution in ValueLimited to “Out of Pocket” Damages?

Indemnification





(Subset: deals with survival provisions)


Release #2: 17Jan12

Types of Damages/Losses CoveredTypes of Damages/Losses Covered

Expressly Excluded

38%

Silent56%

Expressly Included

6%

Expressly Included

6%

Silent39%

Expressly Excluded

55%

Consequential DamagesIncidental Damages

Expressly Included

4%

Silent23%

Expressly Excluded

73%

Punitive Damages

Indemnification


(36% in deals in 2008)(16% in deals in 2006) (8% in deals in 2008)










Release #2: 17Jan12

BasketsBaskets

Indemnification

Deductible

Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $300,000 (the “Deductible”) in which event Sellers shall be responsible only for Losses exceeding the Deductible.

First Dollar

Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the “Threshold”) in which event Sellers shall be responsible for the aggregate amount of all Losses, regardless of the Threshold.

Combination

Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the “Threshold”) in which event Sellers shall be responsible only for Losses in excess of $300,000 (the “Deductible”).


Release #2: 17Jan12

BasketsBaskets

No Basket5%

Combination5%

Deductible59%

First Dollar31%

Indemnification







Release #2: 17Jan12

41%

47%

12%

0%

0.5% or less

> 0.5% to 1%

> 1% to 2%

> 2%

Baskets as % of Transaction ValueBaskets as % of Transaction Value

Indemnification

Deals in 2010

Deals in 2008

Deals in 2006

(Subset: deals with baskets)


Release #2: 17Jan12

Baskets as % of Transaction ValueBaskets as % of Transaction Value(statistical summary)(statistical summary)

________0.65%(0.55% in deals in 2006)(0.40% in deals in 2006)

0.65%(0.66% in deals in 2006)(0.52% in deals in 2006)

All Baskets (other than Combination)





First Dollar





Deductible

MaximumMinimum(> 0)

MedianMeanBasket Type

Indemnification



Release #2: 17Jan12

39%

42%

100%

Other IndemnityClaims

Breaches ofSeller/Target

Covenants

Breaches ofSeller/Target Reps

and Warranties

Baskets Baskets -- General Coverage*General Coverage*

Indemnification

Deals in 2010

Deals in 2008


* Carve outs for individual representations and warranties, fraud, and intentional breaches of representations and warranties addressed on next slide.


Release #2: 17Jan12

90%

27%

53%

39%

16%

17%

17%

49%

69%

60%

43%Broker's/Finder's Fees (Rep)

Capitalization (Rep)

Due Authority (Rep)

Due Organization (Rep)

Employee Benefits/ERISA (Rep)

Environmental (Rep)

No Conflicts (Rep)

Ownership of Shares (Rep)

Taxes (Rep)

Title to/Sufficiency of Assets (Rep)

Fraud

Basket Carve Outs*Basket Carve Outs*

* Only those categories appearing more than 10% of the time for deals in 2010 are shown. Carve outs for breaches of Seller/Target covenants taken into account on prior slide.

Indemnification

Deals in 2010

Deals in 2008

Deals in 2006



Release #2: 17Jan12

Eligible Claim Threshold Eligible Claim Threshold

Indemnification

Sellers shall not be required to indemnify Buyer for any individual item where the Loss relating to such claim (or series of claims arising from the same or substantially similar facts or circumstances) is less than $15,000.



Release #2: 17Jan12

Eligible Claim ThresholdEligible Claim Threshold

No Eligible Claim T hreshold

83%

Includes Eligible Claim T hreshold

17%

Indemnification




Release #2: 17Jan12

““Double MaterialityDouble Materiality”” ScrapeScrape(materiality qualification in reps disregarded)(materiality qualification in reps disregarded)

Indemnification

Materiality qualification in reps disregarded for all indemnification-related purposes

For purposes of this Article VIII (Indemnification), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

Materiality qualification in reps disregarded for calculation of damages/losses only

For the sole purpose of determining Losses (and not for determining whether or not any breaches of representations or warranties have occurred), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.


Release #2: 17Jan12

““Double MaterialityDouble Materiality”” ScrapeScrape(materiality qualification in reps disregarded)(materiality qualification in reps disregarded)


Scrape49%

Not Included51%

Indemnification


No*34%

Yes66%

(Subset: includes “double materiality" scrape)


* Includes agreements that are silent on this issue.

“Double Materiality” Scrape Limited to Calculation of Damages/Losses Only?



Release #2: 17Jan12

Silent 7%

Yes - Less Than Purchase Price

79%

Yes But Not Determinable

7%

Yes - Equal to Purchase Price

7%

Caps*Caps*

* Caps generally applicable to contractual indemnification obligations; does not take into account different caps for specific items (see “Cap Carve Outs”).

Indemnification







Release #2: 17Jan12

9%

0%

4%

14%

17%

14%

43%

Purchase Price

> 50% to < Purchase Price

> 25% to 50%

> 15% to 25%

> 10% to 15%

10%

< 10%

* Caps generally applicable to contractual indemnification obligations; does not take into account different caps for specific items (see “Cap Carve Outs”).

** 2010 percentages total 101% due to rounding.

Cap Amounts as % of Transaction Value*Cap Amounts as % of Transaction Value*

Indemnification

Deals in 2010**

Deals in 2008

Deals in 2006

(Subset: deals with determinable caps)

Deals in 2010 100%0.46%10.00%18.88%

MaximumMinimumMedianMean


Release #2: 17Jan12

47%

13%

88%

22%

53%34%

16%

11%

16%

15%

42%

63%

51%

33%B ro ker ' s/ F ind er ' s F ees ( R ep )

C ap it al izat ion ( R ep )

D ue A ut ho rit y ( R ep )

D ue Organizat ion ( R ep )

Employee B enef it s/ ER ISA ( R ep )

Environment al ( R ep )

Int ellect ual Propert y ( R ep )

N o C onf l ict s ( R ep )

Ownership o f Shares ( R ep )

T axes ( R ep )

T it le t o / Suf f iciency o f A sset s ( R ep )

F raud

Int ent ional B reach o f Seller ' s/ Target 's R eps

B reach o f Seller ' s/ T arget 's C ovenant s

Cap Carve Outs*Cap Carve Outs*

* Only those categories appearing 10% of the time or more for deals in 2010 are shown.

Indemnification

(Subset: deals with caps)

Deals in 2010

Deals in 2008

Deals in 2006


Release #2: 17Jan12

Non-Exclusive Remedy

2%

Silent6%

Exclusive Remedy92%

Indemnification as Exclusive RemedyIndemnification as Exclusive Remedy

Indemnification






Release #2: 17Jan12

9%

84%

56%

9%

Breach of Covenant

Fraud

Equitable Remedies

IntentionalMisrepresentation

Indemnification as Exclusive Remedy Indemnification as Exclusive Remedy –– Carve OutsCarve Outs

Includes "Constructive" or

Negligent1%

Fraud Undefined71%

Limited to Intentional Fraud

2%

Limited to "Actual Fraud"

5%

Limited to "Fraud oIntentional Mis- representation"

21%

(Subset: includes fraud carve out)

Indemnification

Deals in 2010

Deals in 2008

Deals in 2006


(Subset: deals with indemnification as exclusive remedy)


Release #2: 17Jan12

No Escrow/Holdback

14%

Escrow/Holdback and Earnout Setoff are Exclusive Remedies

4%

Escrow/Holdback is Exclusive

Remedy24%

Escrow/Holdback is Not Exclusive

Remedy*57%

Escrows/HoldbacksEscrows/Holdbacks

Indemnification






* Includes deals that state that the escrow/holdback is the exclusive remedy but provide one or more exceptions.


Release #2: 17Jan12

1%

1%

6%

24%

10%

24%

16%

3%

7%

7%3% and less

> 3% to < 5%

5%

> 5% to 7%

> 7% to < 10%

10%

> 10% to 15%

> 15% to 20%

> 20% to 25%

> 25%

Escrows/Holdbacks as % of Transaction Value*Escrows/Holdbacks as % of Transaction Value*

(Subset: deals with determinable escrows/holdbacks)

Indemnification

* 51% of the deals with determinable escrows/holdbacks had a cap equal to the amount of the escrow/holdback.** 2010 percentages total 99% due to rounding.

Deals in 2010**

Deals in 2008

Deals in 2006


Release #2: 17Jan12

27.34%0.33%9.19%9.30%2010

37.30%1.23%9.93%10.51%2008

25.00%1.10%8.95%8.94%2006

MaximumMinimumMedianMeanDeals in:

Indemnification

Escrows/Holdbacks as % of Transaction ValueEscrows/Holdbacks as % of Transaction Value(statistical summary)(statistical summary)

(Subset: deals with determinable escrows/holdbacks)


Release #2: 17Jan12

StandStand--Alone IndemnitiesAlone Indemnities(items for which indemnification specifically provided regardles(items for which indemnification specifically provided regardless of s of

indemnification for breaches of representations and warranties)indemnification for breaches of representations and warranties)

* Other frequently appearing stand-alone indemnities were items disclosed on a schedule; excluded or retained liabilities; and dissenters’ rights/dissenting share payment claims.

11%

82%

61%

11%

3%

None

Other*

Taxes

Environmental

ERISA

Indemnification


Deals in 2010

Deals in 2008

Deals in 2006


Release #2: 17Jan12

Reductions Against BuyerReductions Against Buyer’’s Indemnification Claimss Indemnification Claims

Expressly Included

53%

Silent47% Silent

15%

Expressly Included

85%

Yes28%

Silent72%

Indemnification





Reduction for Insurance ProceedsReduction for Tax Benefits

Express Requirement that Buyer Mitigate Losses?


Release #2: 17Jan12

Dispute Resolution


Release #2: 17Jan12

Waiver of Jury Trial*Waiver of Jury Trial*

Waiver of Jury Trial Provision Included

78%

No Waiver of Jury Trial Provision

22%(49% in deals in 2008)(50% in deals in 2006)(51% in deals in 2008)


Dispute Resolution

* May include deals in jurisdictions where jury trials are not available or where waivers of jury trials are unenforceable.


Release #2: 17Jan12

No General ADR

Provision82%

Includes General ADR Provision**

18%

Mediation0%

Binding Arbitration

89%

Mediation then Binding

Arbitration11%

Alternative Dispute Resolution (Alternative Dispute Resolution (““ADRADR””)*)*

(Subset: includes provision)

* ADR provisions that generally cover disputes under acquisition agreement (rather than those limited to specific disputes such aspurchase price adjustments or earnouts).

** Excludes one deal with undisclosed dispute resolution provisions.





Dispute Resolution


Release #2: 17Jan12

Judicial Arbitration &

Mediation Services

28%

Other22%

American Arbitration Association

50%

Alternative Dispute Resolution (Alternative Dispute Resolution (““ADRADR””))

Arbitration ExpensesSpecified Arbitrator(s)

Silent28%

Expenses Apportioned

6%

Evenly Split28%

Loser Pays38%

Determined by Arbitrator

0%







Dispute Resolution

(Subset: deals with general ADR provisions)




Release #2: 17Jan12

PostPost--Closing Representation of ShareholdersClosing Representation of Shareholders

Indemnification

In any dispute or proceeding arising under or in connection with this agreement following the Closing, the Stockholders’ Representative will have the right, at its election, to retain ABC LLP (the “Law Firm”) to represent it in such matter. Buyer, for itself and the Target and for their respective successors and assigns, hereby waives any conflicts of interest arising from such representation and consents to any such representation in any such matter.


Release #2: 17Jan12

Express Permission to

Represent Target

Shareholders Post-Closing

14%

No Express Permission

86%

Conflict Waiver Required

50%

No Waiver Required50%

PostPost--Closing Representation of ShareholdersClosing Representation of Shareholders

(Subset: includes provision)

Dispute Resolution

2012 SRS M&A Deal Terms Study | 1 © 2012 Shareholder Representative Services LLC. All rights reserved. www.shareholderrep.com

© 2012 Shareholder Representative Services LLC. All rights reserved. www.shareholderrep.com

2012 SRS M&A Deal Terms Study An analysis of deal terms and post-closing experience in private-target M&A transactions

For more information, please contact SRS at [email protected]


A closed deal is not a done deal. Anything can happen after closing. A great variety of issues, often unpredicted, arise over the months and years following the sale. SRS has accumulated years of experience through hundreds of deals. When the stakes are high, shareholders require the most experienced post-closing team.

You worked hard to close the deal. Make sure you have the right representative to see it through.

The SRS Difference:

§  Better escrow economics through Acquiom™

Acquiom provides a completely re-engineered M&A escrow, investment and payments service, which provides a superior client experience while reducing transaction expenses.

§  M&A analytics to drive better deals

SRS has the most extensive database of M&A deal-terms and post-closing claims from private company sales ever assembled.

§  Unmatched dispute resolution and litigation management SRS is the only firm with post-closing expertise based on the successful resolution of hundreds of claims and the completion of final escrow releases and earn-out milestone payments.

§  Post-closing escrow management, client support, online access, and monthly reporting

SRS offers superior client service by anticipating questions and issues that could arise and delivering information online 24/7.

SRS also offers SRS MAX™ for customized deal analytics, and SRS EscrowExchange™ for early escrow liquidity.

For more information visit: www.shareholderrep.com

About SRS | Shareholder Representative Services

About SRS


§  The Deal Terms Study Sample The 2012 SRS Deal Terms Study analyzes 342 private-target acquisitions on which SRS served as the shareholder representative from the start of 2009 through the end of Q3 2012 (the 2011 Study analyzed deals from the start of 2008 through the end of Q3 2011). As used herein, “2012 deals” includes deals closing through the end of Q3 in the 2012 calendar year. Note that data points on past years may differ slightly from previous SRS Deal Terms Studies due to (i) changes in presentation from study-over-study to year-over-year, (ii) deals added in Q4 2011 that were not reported in the 2011 Study, and (iii) reporting medians rather than averages. Sample sizes are larger for more recent years as a result of the growth of SRS.

§  New Data in the 2012 Study Time to exit, equity capital investment data*, termination fees, conflict waivers and more detailed analyses of carveouts to indemnification caps and survival periods have been included for the first time in the 2012 Study.

§  Why Our Study is Unique As shareholder representative, SRS has access to seller management, shareholders, and all deal documents, and manages all post-closing matters. Most information from these sources is not publicly available or reported in other studies. Our goal is to arm deal professionals who negotiate and advise on private-target transactions with robust, reliable sources of information that can’t be found elsewhere.

* Throughout this study, we rely primarily upon S&P Capital IQ™ for equity capital investment data.

About this Study

Overview

•  $55.3 Billion in stated deal value

•  $42.7 Billion paid at closing

•  $4.9 Billion held in escrow

•  $7.7 Billion in defined earn-out consideration, plus uncapped potential payments

•  342 Acquisitions analyzed

•  Aggregate data on 200+ deal terms

•  301 Mergers, 13 asset purchases and 28 stock purchases

•  82 Deals with earn-outs


§  Overview...............................................................................5 •  Key Findings....................................................................5 •  Seller Industries..............................................................6 •  Transaction Values..........................................................7 •  Years to Exit...................................................................8 •  Transaction Values as Multiples of Return on Equity

Capital Invested...............................................................9

•  Closing Consideration Trends.........................................10 •  Sellers’ Financings and Earnings...................................11

§  Financial Provisions............................................................13 •  Post-Closing Purchase Price Adjustments......................14 •  Earn-outs (Non-Life Sciences)........................................19 •  Management Carveouts.................................................23 •  Treatment of Options (Non-Life Sciences)......................24

§  Pervasive Qualifiers............................................................25 •  Definition of Material Adverse Effect..............................26 •  Knowledge Standards....................................................31

§  Seller’s Representations, Warranties, and Covenants..........32 •  “No Undisclosed Liabilities” Representation...................33 •  “Compliance with Laws” Representation........................34 •  “10b-5” and “Full Disclosure” Representations...............35 •  “No Other Representations” and “Non-Reliance” Reps....37 •  Covenants.....................................................................38

§  Closing Conditions..............................................................42 •  Accuracy of Seller’s Representations..............................43 •  “Material Adverse Change” Condition.............................47 •  No Legal Proceedings Challenging the Transaction.........48

•  Legal Opinions (Non-Tax)...............................................49 •  Appraisal Rights............................................................50

§  Indemnification.....................................................52 •  Stand-Alone Indemnities................................................53 •  “Sandbagging”..............................................................54 •  Survival/Time to Assert Claims......................................55 •  Types of Losses Covered................................................59 •  Baskets.........................................................................60 •  Materiality Scrape.........................................................67 •  Caps.............................................................................68 •  Reductions Against Buyer’s Indemnification Claims........72 •  Indemnification as Exclusive Remedy…..........................73 •  Escrows/Holdbacks.......................................................74 •  Special Escrows............................................................77

§  Dispute Resolution.............................................................78 •  Waiver of Jury................................................................79 •  Alternative Dispute Resolution.......................................80

§  Termination Fees................................................................82 §  Glossary.............................................................................84

Table of Contents

TOC


§  Deal sizes: although the median deal size* rose slightly to $75 million in 2012 from $70 million in 2011, deals $50 million or less grew to 42% of deals in 2012, up from 33% in 2011.

§  Seller financial performance: acquisitions remain heavily weighted toward Sellers with revenue, and Sellers in the aggregate continue to show improved earnings since 2009. Coupled with a slight increase in Seller-favorable terms generally, data suggests that some degree of market leverage is returning to Sellers that have survived the downturn even as M&A activity remains deliberate.

§  Cash vs. stock deals: cash is still king in M&A as long-term interest rates decline.

§  Earn-outs: usage of financial metrics (revenue and earnings) and multi-metric achievement tests is declining, accompanied by a shift toward longer earn-out periods.

§  Indemnification trends: median R&W survival periods and escrow sizes have leveled off at 18 months and 10–12% of transaction values, respectively, since 2009. Other terms are increasingly Seller-favorable, for example, an increase in available offsets against Buyer indemnification claim amounts and requiring that claims exceed a minimum threshold.

§  Alternative dispute resolution (“ADR”): mandatory ADR such as mediation and arbitration has steadily declined since 2010, down to 26% of deals in 2012 from 41% in 2010.

§  Post-closing expense funds: the median size as a percentage of the indemnification escrow continues to trend upward, at 2.08% in 2012.

* Including escrowed amounts but not potential earn-out consideration.

Key Findings

Overview


Subset: new deals since the 2011 Study

Seller Industries

Overview

Biopharmaceuticals 10%

Business products and services

15%

Computers and peripherals

5%

Consumer products and services

3%

Electronics and instrumentation

4% Health care services

3% Industrial and energy

5%

IT services 13%

Media and entertainment

6%

Medical devices and equipment

7%

Networking equipment 1%

Semiconductors 1%

Software 22%

Telecommunications 4%

Other 1%


* “Transaction values” as used herein includes escrowed amounts but does not include potential earn-out condisderation.


Transaction Values*

Overview

$25MM or less 19%

>$25MM to $50MM

23%

>$50MM to $100MM 22%

>$100MM to $250MM

20%

>$250MM to $750MM

13%

More than $750MM 3%


0%

25%

50%

75%

100%

0

2

4

6

8

10

12

14

16

18

0 2 4 6 8 10 12 14 16 18 20 22 24

% o

f dea

l se

t

Num

ber

of

exit

s

Years from founding to exit

Cumulative % of deal set Exits

Years to Exit

Overview

Years to exit Equity financing rounds to exit Equity capital invested

Median: 7 Average: 9

Median: 3 Average: 3

Median: $28MM Average: $36MM



0

3

6

9

12

15

18

21

24

27

30

Mult

iple

s of

ret

urn

on e

quit

y ca

pit

al inv

este

d

Deal by deal

* Transaction values include escrowed amounts but do not include potential earn-out consideration. ** Assumes equity capital is invested en bloc, disregarding staged investments and liquidation preferences.

Subset: new deals since the 2011 Study with equity capital investment data available

Transaction Values* as Multiples of Return on Equity Capital Invested

Overview

Median return: 3.8x

Average return: 8.0x

§  If all equity capital is invested one year after founding, a 3.8x return seven years after founding yields a 25% IRR**.


75%

84% 86% 85% 6%

4% 3% 2%

19% 12% 11% 13%

2009 2010 2011 2012

All cash All stock Cash/stock combo

* The Long-term Real Rate (Average) is the unweighted average of bid real yields on all outstanding TIPS with remaining maturities of more than 10 years and is intended as a proxy for long-term real rates.

75%

84% 86% 85%

2.24%

1.72%

1.36%

0.22%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0%

25%

50%

75%

100%

2009 2010 2011 2012

All-cash deals Long-term Real Rate (average)

Consideration type All-cash deals vs. long-term interest rates

Closing Consideration Trends

Overview


3.0

3.3 3.3

3.1

3.0 3.0 3.0

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012

Average Median

* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization and thus without meaningful chances of having revenue or positive EBITDA at the time of sale.

100% 98% 98% 97%

19%

31% 28%

38%

0%

25%

50%

75%

100%

2009 2010 2011 2012

Sellers with revenue Sellers with positive EBITDA

Equity capital investment rounds at exit Sellers with revenue and positive EBITDA

Sellers’ Financings and Earnings

Overview

Subset: non-life sciences deals*


($5,170,210)

($3,312,449)

($2,150,302)

($1,311,359)

($6,000,000)

($4,000,000)

($2,000,000)

$0 2009 2010 2011 2012

Sellers’ Financings and Earnings

Median Seller EBITDA, last 12 months (non-life sciences deals*)

Overview

* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization and thus without meaningful chances of having revenue or positive EBITDA at the time of sale.


§  Post-closing purchase price adjustment example “The ‘Adjustment Amount’ (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Working Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer by Buyer to an account specified by Seller.”

“‘Working Capital’ as of a given date shall mean the amount calculated by subtracting the current liabilities of Seller as of that date from the current assets of Seller as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the ‘Initial Working Capital’) shall be deemed Two Million Dollars ($2,000,000).”

Post-Closing Purchase Price Adjustments



54%

80%

69%

76%

0%

25%

50%

75%

100%

2009 2010 2011 2012

* 51% of post-closing purchase price adjustments in 2012 deals were based on more than one metric. ** Does not include post-closing adjustments for unpaid transaction expenses.

71%

37%

49%

9%

5%

1%

74%

36%

32%

14%

8%

0%

Working capital

Cash

Debt

Other**

Assets

Earnings

2012 2011

Adjustment provision included Adjustment metrics* (subset: includes adjustment)

Post-Closing Purchase Price Adjustments



§  Tax exclusion example “‘Adjusted Working Capital’ means current assets minus current liabilities; provided, however, that ‘Adjusted Working Capital’ excludes from current assets all tax assets and excludes from current liabilities all tax liabilities.”

Subset: 2012 deals with working capital adjustments

Post-Closing Purchase Price Adjustments: Working Capital Excludes Tax-Related Items


Tax-related items excluded from calculation

42%

Tax-related items not

excluded from calculation

58%


11%

58%

15% 15%

19%

54%

16%

10%

27%

58%

9% 6%

GAAP GAAP consistent with past practices

Other* Silent

2010 2011 2012

* “Other” methodology most commonly used was GAAP as modified by the principles and changes set forth on a schedule.

Subset: deals with post-closing purchase price adjustments

Post-Closing Purchase Price Adjustments: Methodology for Preparation of Closing Balance Sheet



Subset: 2012 deals with post-closing purchase price adjustments

Post-Closing Purchase Price Adjustments: Thresholds and Separate Escrows


Source of payment if buyer-favorable adjustment Adjustment only if threshold exceeded

Separate escrow 17%

Payment not from indemnity escrow

5%

True-up from indemnity

escrow 95%

No separate escrow 83%

Yes 13%

No 87%


18% 17%

12%

14%

5%

10%

15%

20%

2009 2010 2011 2012

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study. ** Earn-outs can include more than one metric, such as revenue and earnings. *** Examples: unit sales, product launches, divestiture of assets.

Subset: non-life sciences deals

60%

20%

33%

64%

36%

36%

Revenue

Earnings/EBITDA

Other***

2012 2011

Earn-out included

Earn-outs (Non-Life Sciences*)


Earn-out metrics**

§  Earn-outs are much more common in SRS’s life sciences deals than other types of deals

•  82% of biopharmaceutical deals

•  84% of medical device deals

•  14% of all other SRS deals


36%

23%

38%

29%

0%

10%

20%

30%

40%

50%

2009 2010 2011 2012

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study. ** Calculated as the sum of potential earn-out payments over the amount paid at closing (including escrowed amounts). *** Measured by the date the latest earn-out period ends.

Subset: non-life sciences deals with earn-outs

20%

33%

13%

20%

13%

0%

55%

18%

9%

0%

18%

0%

1 year or less

>1 to 2 years

>2 to 3 years

>3 to 4 years

>4 to 5 years

>5 years

2012 2011

Median earn-out potential as percentage of closing payment** Earn-out length*** (2012 median: 24 months)

Earn-outs (Non-Life Sciences*)



Included 6%

Included 13%

Included 47%

Not included

94%

Not included

87%

Not included

53%

Express Yes 67%

Express No 6%

Silent 27%

Covenant to run business in accordance with Seller's past

practices

Covenant to run business to maximize earn-out payments

Earn-out accelerates (fully or partially) on change in control

of earn-out assets**

Buyer can offset indemnity claims against future earn-out

payments

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study. ** Generally subject to exceptions, such as if the subsequent buyer assumes the earn-out obligations.

Subset: 2012 non-life sciences deals with earn-outs

Earn-outs (Non-Life Sciences*): Covenants, Acceleration and Offsets



§  Example provision intended to ensure earn-out is not treated as a security “The right of Seller to a portion of the Earn-out Amount, if any, shall not be represented by a certificate or other instrument, shall not represent an ownership interest in Buyer or the Business and shall not entitle Seller to any rights common to any holder of any equity security of Buyer.”

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.

Subset: non-life sciences deals with earn-outs

§  Example disclaimer of fiduciary relationship “Nothing in this Agreement creates a fiduciary duty on the part of Buyer to Seller in respect of the Earn-out.”

Earn-out is not a security Disclaimer of fiduciary relationship

Earn-outs (Non-Life Sciences*): Additional Provisions


Included 13%

Not included

87%

Included 13%

Not included

87%


27%

20% 19%

0%

10%

20%

30%

40%

50%

2010 2011 2012

* Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. “Transaction value” includes escrowed amounts but does not include potential earn-out consideration.

10.0% 10.0%

8.6%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2010 2011 2012

Deals including a management carveout Median size as a percentage of transaction value*

Management Carveouts: Frequency and Size


§  A “management carveout” here is a cash payment triggered by an acquisition that guarantees Seller’s management a portion of the deal consideration at closing when such participants would otherwise receive little or nothing in respect of their equity ownership, usually due to liquidation preferences. Because transaction bonuses often differ from management carveouts in size, structure and timing of adoption, they are not included below.


56%

74%

63%

74%

44%

34%

56%

49%

0%

25%

50%

75%

100%

2009 2010 2011 2012

Options contribute to escrow

Full acceleration of vesting***

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study. ** Excludes deals where option-holders received no consideration. *** Excludes deals where options were assumed by the Buyer; measures acceleration of employee options only.

Subset: non-life sciences deals

13%

27%

39%

28%

87% 73% 61% 72%

2009 2010 2011 2012

Options assumed Options not assumed

Contribution and acceleration** Assumption of options by Buyer

Treatment of Options (Non-Life Sciences*): Contribution, Acceleration and Assumption



§  Example term “‘Material Adverse Effect’” means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, prospects, capitalization, condition (financial or other), or results of operations of Seller.”

* “Material Adverse Effect” or “Material Adverse Change” was defined in 98% of deals.

Subset: deals with MAE defined*

25% 24%

15% 13%

75% 76% 85% 87%

2009 2010 2011 2012

Prospects included Prospects not included

Declining use of “prospects”

Definition of Material Adverse Effect: Prospects Included



§  Example term “‘Material Adverse Effect’ means any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Seller.”

§  96% of deals had forward-looking language*

* Includes deals where the MAE definition did not include forward-looking language, but forward-looking language was predominantly used in conjunction with the use of the defined term in the body of the agreement. ** Agreements in the “Other” category used a combination of “could” and “would” or some other forward-looking standard.

Subset: 2012 deals with an MAE definition with forward-looking language

"Could be" 19%

"Would be" 64%

Other** 17%

Forward-looking MAE details

Definition of Material Adverse Effect: Forward-Looking Language



§  Example term “‘Material Adverse Effect’” means any change . . . except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions.”

Subset: 2012 deals with MAE defined

Definition includes carveouts

94%

No carveouts 6%

Deals with carveouts

Definition of Material Adverse Effect: Carveouts



58%

72% 71%

63%

97%

50%

86%

78%

62%

77% 80% 79%

92%

56%

87% 85%

70% 71%

82% 79%

96%

59%

92%

80%

Actions required by agreement

Announcement of deal

Changes in accounting standards

Changes in law Economic conditions

Financial market

downturn

Industry conditions

War or terrorism

2010 2011 2012

Subset: MAE definition has carveouts

Definition of Material Adverse Effect: Carveouts

Carveout frequency



§  Example term “‘Material Adverse Effect’ means any change . . . except to the extent resulting from (A) changes in general local, domestic, foreign, or international economic conditions, (B) changes affecting generally the industries or markets in which Company operates, (C) acts of war, sabotage or terrorism, military actions or the escalation thereof, (D) any changes in applicable laws or accounting rules or principles, including changes in GAAP, (E) any other action required by this Agreement, or (F) the announcement of the Transactions (provided that such event, change, or action does not affect Seller in a substantially disproportionate manner).”

Subset: MAE definition has carveouts

At least one carveout

qualified by disproportionate

effect 90%

No carveouts qualified by

disproportionate effect 10%

Disproportionate effect details (2012 deals)

Definition of Material Adverse Effect: Carveouts Qualified by Disproportionate Effect



§  Actual knowledge “‘Knowledge’ means the actual knowledge of the directors and officers of Seller.”

§  Constructive knowledge “‘Knowledge’ means the actual knowledge of the directors and officers of Seller and the knowledge that such directors and officers would have after due inquiry.”

* 49% of 2012 deals include more than one constructive knowledge element, e.g., a due inquiry requirement as well as role-based deemed knowledge.

82%

36%

11%

19%

17%

1%

Reasonable or due inquiry

Reasonable or due inquiry of knowledgeable persons

Other form of reasonable or due inquiry

Role-based constructive knowledge

Other form of constructive knowledge

"Constructive knowledge" not defined (silent)

Knowledge definition details (2012 deals)

Knowledge Standards


Actual 13%

Constructive 83%

Not defined 4%

Subset: constructive knowledge*


Seller’s Representations, Warranties and Covenants


§  Example Buyer-favorable formulation “Seller has no liability except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Seller’s ordinary course of business since the date of the Interim Balance Sheet.”

§  Example Seller-favorable formulation “Seller has no liability of the nature required to be disclosed in a balance sheet prepared in accordance with GAAP [or which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect], except for liabilities reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in Seller’s ordinary course of business since the date of the Interim Balance Sheet.”

* All 2012 deals included this rep.

88%

61% 61% 60%

22% 39% 39% 40%

2009 2010 2011 2012

Buyer Seller

Representation knowledge-qualified

Party favored by definition

“No Undisclosed Liabilities” Representation*

Representations, Warranties and Covenants

4%

1%

2011 2012


§  Example representation “To the Seller’s knowledge, the Business has been and is being conducted in compliance with all applicable laws.”

* All 2012 deals included this rep.

5%

81%

12%

80%

Complete rep is knowledge qualified

Covers past and present compliance

Includes notice of investigation Includes notice of violation

“Compliance with laws” details (2012 deals)

“Compliance with Laws” Representation*



§  Example “10b–5” representation “No representation or warranty or other statement made by Seller in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to Section 2.7(a) or otherwise in connection with the Contemplated Transactions contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.”

§  Example “full disclosure” representation “Seller does not have Knowledge of any fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Letter.”

* Does not include reps that apply only to the shareholder information statement (and not the acquisition agreement).

"10b-5" rep only* 47%

"Full disclosure" rep only*

1%

Both "10b-5" and "full

disclosure" reps* 6%

Neither rep 46%

Inclusion of reps (2012 deals)

“10b–5” and “Full Disclosure” Representations



Knowledge qualified

19%

Not knowledge qualified

81%

Note: Two deals included “full disclosure”-only reps, and both were knowledge qualified.

Subset: all deals since 2010

Only "full disclosure" rep

knowledge qualified

61%

Only "10b-5" rep knowledge

qualified 4%

Both reps knowledge qualified

8%

Neither rep knowledge qualified

27%

Subset: “10b–5” rep only Subset: both “10b–5” and “full disclosure” reps

“10b–5” and “Full Disclosure” Representations: Knowledge Qualifiers



§  “No other representations” example “Buyer acknowledges that Seller has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in this Article III.”

§  “Non-reliance” example “Buyer is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties provided in this Article III.”

Inclusion of reps (2012 deals)

“No Other Representations” and “Non-Reliance” Reps


"No other reps" only

32%

"Non-reliance"

only 1%

Both 19%

Neither 48%


* Sample excludes “sign-and-close” deals. ** Such deals generally eliminate Buyer’s right to indemnification for the updated matter if Buyer chooses to waive the relevant closing condition or does not exercise an existing or newly provided right to terminate the transaction because of the update. Includes deals where Buyer and Seller agree to negotiate effects on indemnification rights in good faith.

Subset: 2012 deals

Deals including a duty to notify Buyer’s indemnification rights limited for notified matters

Covenants: Seller’s Duty to Notify Buyer of Pre-Closing Breaches of Representations and Warranties


Express duty to notify 87%

No express duty 13%

Yes** 5%

No 95%


* Sample excludes “sign-and-close” deals.

Covenants: Seller’s Duty to Notify Buyer of Breaches of Covenants*

Seller expressly required to notify Buyer of breaches of covenants (2012 deals)


Yes 80%

No 20%


§  Example no-shop/no-talk “Between the date of this Agreement and the Closing Date, Seller shall not . . . (i) solicit, initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition Proposal or (ii) participate in any discussion, conversation, negotiation or other communication regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.”

§  Example fiduciary exception “Notwithstanding the foregoing . . . the Seller Board may withhold, withdraw, amend or modify its recommendation to the Selling Shareholders if it determines in good faith by resolution duly adopted, after consultation with outside legal counsel, that it is required to do so in order to comply with its fiduciary duties to the Selling Shareholders under applicable law.”

Covenants: No-Shop/No-Talk



* Sample excludes “sign-and-close” deals. ** Fiduciary exception subset excludes stock-purchase deals.

Covenants: No-Shop/No-Talk*

Details**


No-shop/no-talk covenant not included

5%

Covenant includes fiduciary exception 14%

No fiduciary exception 86%

No-shop/no-talk covenant included

95%


Closing Conditions*

* This section’s analyses exclude “sign-and-close” deals.


§  At signing only “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the date made.”

§  At closing only “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.”

§  At signing and closing “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the date made and as of the Closing Date as if made on the Closing Date.”

0%

24%

76%

At signing only At closing only Both

Accuracy: timing (2012 deals)

Accuracy of Seller’s Representations (Timing): When Must They Be Accurate?

Closing Conditions


§  Accurate “in all respects” “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all respects as of the Closing Date as if made on the Closing Date.”

§  Accurate “in all material respects” “Each of the representations and warranties made by Seller in this Agreement shall have been accurate in all material respects as of the Closing Date as if made on the Closing Date.”

§  MAE qualification “Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect.”

Accuracy: materiality (2012 deals)

Accuracy of Seller’s Representations (Materiality): How Accurate Must They Be?

Closing Conditions

20% 26%

72% 68%

8% 6%

At signing At closing

MAE "In all material respects" "In all respects"


§  Example capitalization carveout “The representations and warranties set forth in Section 3.3 (Capitalization) shall be accurate in all respects as of the Closing Date as if made on the Closing Date. Each of the other representations and warranties made by Seller in this Agreement shall be accurate as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect.”

Subset: 2012 deals with MAE qualifiers in the “accuracy of reps” condition

60% 64%

At signing At closing

Carveout applies

Accuracy of Seller’s Representations (Materiality): MAE Qualifier with Capitalization Representation Carveout

Closing Conditions


§  Example materiality scrape “Each of the representations and warranties made by Seller in this Agreement shall be accurate in all respects as of the Closing Date as if made on the Closing Date, except for inaccuracies of representations or warranties the circumstances giving rise to which, individually or in the aggregate, do not have and could not reasonably be expected to have a Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties, all materiality, “Material Adverse Effect” and similar qualifications contained in such representations and warranties shall be disregarded).”

Subset: 2012 deals with materiality or MAE qualifiers in the “accuracy of reps” condition

Accuracy of Seller’s Representations (Materiality): Materiality Scrape

Closing Conditions

87% 85%

Included as of signing Included as of closing


§  “Stand-alone” MAC condition “Since the date of this Agreement, there has not been any Seller Material Adverse Change.”

§  “Back-door” MAC condition The Agreement includes an “Absence of Changes” representation:

•  “Section 3.6 Absence of Changes. (i) Since the Balance Sheet Date, there has not been any Seller Material Adverse Change.”

and includes a condition “bringing down” the accuracy of Seller’s representations and warranties:

•  “The representations and warranties made by Seller in this Agreement shall be true and correct in all respects when made and at the Closing Date as if made on the Closing Date.”

Stand-alone condition

only 27%

Back-door condition

only 13%

Both 57%

Neither 3%

MAC condition details (2012 deals)

“Material Adverse Change” Condition

Closing Conditions


§  Example condition “There will not be pending [or threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or any Person] challenging or seeking to restrain or prohibit the consummation of the transactions contemplated herein.”

2011 deals

2012 deals

“No Legal Proceedings” Condition

Closing Conditions

Not included

18%

Governmental legal proceedings only 36%

Any legal proceeding 64%

Condition included

82%

Not Included

20%

Governmental legal proceedings only 34%

Any legal proceeding 66%

Condition Included

80%


63%

55%

68%

50%

37% 45% 32% 50%

2009 2010 2011 2012

Yes* No

Legal Opinions (Non-Tax) of Seller’s Counsel

Opinion required as a condition to closing

* Includes opinions delivered pursuant to both stand-alone and “closing deliverables” conditions.

Closing Conditions


Subset: mergers

Appraisal rights "not available" to

percentage of shareholders

27%

Appraisal rights "not exercised" by

percentage of shareholders

37%

Appraisal rights "neither available to nor exercised by" percentage of

shareholders 19%

Minimum shareholder

approval only* 17%

Appraisal rights condition included Drafting details

Appraisal Rights Condition

* Includes deals without an express appraisal rights condition but with a condition specifying a minimum percentage of shareholder votes (on a fully-diluted basis) approving the merger, effectively waiving appraisal rights.

Closing Conditions

90%

84%

65% 60%

10% 16% 35% 40%

2009 2010 2011 2012

Yes* No Subset: 2012 deals with condition included


14%

26%

10%

29%

47%

60%

56%

50%

26%

20%

22%

7%

10%

22%

Up to 3% >3% to 8% >8% to 10% More than 10%

* These deals did not include an express appraisal rights condition, but did include a condition specifying a minimum percentage of shareholder votes (on a fully diluted basis) approving the merger, effectively waiving appraisal rights.

Subset: 2012 mergers with an appraisal rights condition

Appraisal Rights Condition: Thresholds

Condition threshold details

Closing Conditions

Appraisal rights "not available" to percentage of shareholders

Appraisal rights "not exercised" by percentage of shareholders

Appraisal rights "neither available to nor exercised by" percentage of

shareholders

Minimum shareholder approval only*


Indemnification


82%

77%

65%

47%

42%

39%

33%

20%

18%

17%

12%

7%

3%

3%

2%

2%

1%

1%

Payments to dissenting shareholders

Accuracy of closing certificates

Taxes

Transaction expenses

Litigation

Purchase price adjustments

Fraud and willful misrepresentation

Capitalization

Employee compensation

Intellectual property matters

Excess parachute payments under 280G

Fees and costs

Authority

Employee benefits/ERISA

Regulatory matters

Third-party consents

Environmental

Undisclosed contracts

* Line items for which indemnification is expressly provided beyond the standard line-item indemnities for Seller’s breaches of (i) representations and warranties and (ii) covenants.

Stand-Alone Indemnities*

Frequency (2012 deals)

Indemnification


§  Pro-sandbagging example “The right to indemnification, reimbursement or other remedies based upon any such representation or warranty will not be affected by any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of such representation warranty…”

§  Anti-sandbagging example

“No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such breach before Closing.”

* For purposes of this Study, “pro-sandbagging” excludes clauses that state, for example, that Seller’s representations and warranties merely “survive Buyer’s investigation” unless they include an express statement that Buyer’s knowledge acquired outside of any investigation made pursuant to the agreement impacts Buyer’s post-closing indemnification rights.

38% 32%

35% 30%

8% 2%

3%

1%

54% 65% 62% 68%

2009 2010 2011 2012

Pro-sandbagging provision included Anti-sandbagging provision included Silent

Year-over-year trend

“Sandbagging”

Indemnification


§  Example survival provisions •  “Section 10.1 Survival. All

representations, warranties and covenants in this Agreement and the Disclosure Schedules and any other certificate or document delivered pursuant to this Agreement will survive the Closing for a period of 12 months.”

•  “Section 10.5 Time Limitations. If the Closing occurs, Seller will have no liability (for indemnification or otherwise) with respect to any representation or warranty unless on or before the 12-month anniversary of the Closing Buyer notifies Sellers of a Claim specifying the factual basis of such Claim in reasonable detail to the extent then known by Buyer.”

* Carveouts to the general survival period are discussed on the next slide.

2%

24%

19%

40%

3%

12%

0%

3%

21%

9%

46%

2%

18%

1%

Less than 12 months

12 months

>12 to <18 months

18 months

>18 to <24 months

24 months

>24 months

2012 2011

Survival frequency* (2012 median: 18 months)

Survival/Time to Assert Claims

Indemnification


* Matters subject to carveouts survive longer than the general survival period. 2% of 2012 deals had no carveouts.

Survival/Time to Assert Claims: Carveouts to General Survival Period

Frequency (2012 deals)

Indemnification

87%

86%

82%

76%

68%

65%

57%

52%

40%

36%

30%

21%

11%

10%

4%

2%

1%

0%

0%

Capitalization

Due authority

Ownership of shares

Taxes

Due organization

Fraud

Non-willful breach of Seller's covenants

Broker/finder fees

Intentional misrepresentation

Intellectual property


No conflicts

Title to/sufficiency of assets

Environmental

Related-party transactions

Solvency

Product liabilities

Undisclosed liabilities

Accounts receivable


Statute of limitations***

42%

Reps survive "indefinitely"

34%

Silent/unspecified

1%

1 year or less 3%

>1 to 2 years 10%

>2 to 3 years 1%

>3 to 4 years 4%

>4 years 5%

* Organization, due authority, capitalization, etc. (other than taxes, intellectual property and fraud). ** No tax representations survived indefinitely. *** Usually including some period thereafter, e.g. 60 days.

Subset: 2012 deals that include the specified carveout(s). Years denote additional survival time after expiration of the general survival period.

Group of “Fundamental Representations”* Tax representations**

2nd-Level Survival Periods for Specified Carveouts

Indemnification


86%

Silent/unspecified

1%

1 year or less 3%

>1 to 2 years 4%

>2 to 3 years 2% >3 to 4 years

2%

>4 years 2%



16%

Silent/unspecified

2%

1 year or less 30%

>1 to 2 years 46%

>2 to 3 years 2%

>3 to 4 years 2%

>4 years 2%

* No IP representations survived indefinitely. ** No fraud/intentional misrepresentation carve-outs survived for “1 year or less” or for “>2 to 3 years”. *** Usually including some period thereafter, e.g. 60 days.

Subset: 2012 deals that include the specified carveout(s). Years denote additional survival time after expiration of the general survival period.

Intellectual property representations* Fraud/intentional misrepresentation**

2nd-Level Survival Periods for Specified Carveouts

Indemnification


29%

Carveouts survive

"indefinitely" 48%

Silent/unspecified

16%

>1 to 2 years 2%

>3 to 4 years 1%

>4 years 4%


3% 2% 4%

27%

73%

12%

42%

11%

24% 86% 54% 62%

Punitive damages Incidental damages Consequential damages Diminution in value

Expressly included Expressly excluded Silent

Subset: 2012 deals

Types of Losses Covered

Indemnification


§  Deductible “Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $300,000 (the ‘Deductible’) in which event Securityholders shall be responsible only for Losses exceeding the Deductible.”

§  First dollar

“Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the ‘Threshold’) in which event the Securityholders shall be responsible for the amount of all Losses, regardless of the Threshold.”

§  Combination “Securityholders shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the ‘Threshold’) in which event the Securityholders shall be responsible only for Losses in excess of $300,000 (the ‘Deductible’).”

Deductible 37%

First dollar 58%

Combination 3%

No basket 2%

Basket frequency (2012 deals)

Baskets: Definitions

Indemnification


52%

40%

8%

0%

53%

40%

7%

0%

56%

33%

10%

1%

0.5% or less

>0.5% to 1%

>1% to 2%

>2%

2012 2011 2010

Subset: deals with deductible and first-dollar baskets

0.75%

0.66%

0.55% 0.56% 0.63%

0.49% 0.50% 0.50%

0.00%

0.25%

0.50%

0.75%

1.00%

2009 2010 2011 2012

Median deductible Median first dollar

Basket sizes Median basket size, year-over-year

Baskets as a Percentage of Transaction Value

Indemnification


Subset: 2012 deals with baskets

Baskets as a Percentage of Transaction Value

Indemnification

Basket type Mean Median Minimum Maximum

Deductible 0.64% 0.56% 0.07% 1.33%

First dollar 0.51% 0.50% 0.04% 1.60%

All baskets (other than

combination) 0.56% 0.50% — —


100%

24%

33%

100%

27%

33%

100%

21%

21%

Breaches of Seller's representations and warranties

Breach of Seller's covenants

Other indemnity claims

2012 2011 2010

* Carveouts to general basket coverage are discussed on the next slide.

Subset: deals with baskets

Baskets: General Coverage*

Coverage details

Indemnification


* 7% of 2012 deals with baskets had no carveouts.


Baskets: Carveouts

Frequency*

Indemnification

75%

75%

75%

70%

67%

62%

61%

52%

42%

41%

20%

16%

7%

6%

4%

3%

1%

0%

0%

Fraud

Capitalization

Due authority

Ownership of shares


Due organization

Taxes

Broker/finder fees




No conflicts

Environmental




Solvency

Accounts receivable

Product liabilities


§  Example eligible claim threshold “Securityholders shall not be required to indemnify Buyer for any individual item where the Loss relating to such claim (or series of claims arising from the same or substantially similar facts or circumstances) is less than $25,000.”


Threshold included, year-over-year

Baskets: Eligible Claim Threshold

Indemnification

4%

20%

26%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012


§  Materiality qualifications in representations and warranties disregarded for all indemnification purposes (determining breaches and calculating losses) “For purposes of this Article X (Indemnification), the representations and warranties of Seller shall not be deemed qualified by any references to materiality or to Material Adverse Effect.”

§  Materiality qualifications in representations and warranties disregarded for calculation of losses only

“For the sole purpose of determining Losses (and not for determining whether any breach of any representation or warranty has occurred), the representations and warranties of Seller shall not be deemed qualified by any references to materiality or to Material Adverse Effect.”

“Materiality Scrape” Example Definitions

Indemnification


2011 deals

2012 deals

“Materiality Scrape” Inclusion

Indemnification

Materiality qualifiers not disregarded

18%

For determining breach only 12%

For determining damages only 56%

For determining breach and damages 32%

Materiality qualifiers

disregarded 82%

Materiality qualifiers not disregarded

18%

For determining breach only 18%

For determining damages only 57%

For determining breach and damages 25%

Materiality qualifiers

disregarded 82%


19%

30%

27%

10% 10%

1% 0%

1%

19% 18%

31%

16%

12%

3%

0% 2%

23%

26%

21%

15% 13%

1% 0%

1%

Less than 10% 10% >10% to <15% 15% >15% to 25% >25% to 50% >50% but less than purchase

price

Purchase price

2010 2011 2012

* In 2012 deals with escrows/holdbacks, 95% of caps equaled the escrowed amount.

Subset: 2012 deals with determinable caps

Caps as a Percentage of Transaction Value*

Indemnification

Mean Median Minimum Maximum

12.97% 11.13% 2.50% 100.00%


Subset: 2012 deals with caps

Cap Carveouts

Frequency

Indemnification

91%

79%

77%

74%

63%

61%

49%

46%

40%

29%

22%

18%

8%

7%

4%

1%

1%

0%

0%

Fraud

Capitalization

Due authority

Ownership of shares

Taxes

Due organization


Broker/finder fees




No conflicts


Environmental


Product liabilities

Solvency

Accounts receivable



Purchase price 88%

Unlimited liability

2%

Silent/unspecified

6%

25% or less 1%

Other*** 3%

* Organization, due authority, capitalization, etc. (other than taxes, intellectual property and fraud). No deals set liability for breaches of “Fundamental Representations” as a percentage of the deal outside of the “25% or less” range. ** No deals set liability for tax representations as a percentage of the deal outside of the “>25 to 50%” range. *** “Other” generally includes offsets against future earn-outs above the general cap.

Subset: 2012 deals that include the specified carveout(s)

Group of “Fundamental Representations”* Tax representations**

2nd-Level Caps for Specified Carveouts

Indemnification

Purchase price 84%

Unlimited liability

4%

Silent/unspecified

7%

>25% to 50% 1% Other***

4%


Purchase price 29%

Silent/unspecified

3%

25% or less 26%

>25% to 50% 26%

>50% to 75% 3%

Other*** 13%

* No deals set liability for breaches of IP representations as unlimited or in the “>75% to less than purchase price” range. ** Measures liability for shareholders that did not participate in the fraud (liability for participating shareholders was typically unlimited). No deals set liability for fraud/intentional misrepresentation as a percentage of the deal outside of the “25% or less” range. *** “Other” generally includes offsets against future earn-outs above the general cap.

Subset: 2012 deals that include the specified carveout(s)

Intellectual property representations* Fraud/intentional misrepresentation**

2nd-Level Caps for Specified Carveouts

Indemnification

Purchase price 64%

Unlimited liability

24%

Silent/unspecified

8%

25% or less 2% Other***

2%


75%

17% 21%

81%

31%

20%

84%

34%

26%

Reduction for insurance proceeds Reduction for tax benefits Buyer required to mitigate losses*

2010 2011 2012

* Includes agreements requiring the Buyer to seek payments under applicable insurance policies.

Reductions Against Buyer’s Indemnification Claims

Provision included

Indemnification


Exclusive remedy

96%

Non-exclusive remedy

1%

Silent 3%

* Equitable remedies other than specific performance or injunctive relief, such as rescission or reformation.

Subset: 2012 deals

87%

54%

39%

28%

21%

4%

Fraud

Equitable remedies*


Breach of covenants

"Willful" breach of covenants

"Intentional" breach of covenants

Exclusivity Carveouts to exclusive remedy

Indemnification as the Exclusive Remedy for Breaches of the Agreement

Indemnification


* 97% of deals included an escrow or holdback for general indemnification purposes. Data does not include special escrows.

Subset: 2012 deals with escrows/holdbacks*

Escrows/Holdbacks as a Percentage of Transaction Value

Indemnification

Mean Median Minimum Maximum

12.27% 11.15% 2.50% 30.00%

4% 3%

16%

32%

19%

13%

10%

3%

7%

4%

8%

17%

29%

19%

13%

4% 3% 3%

15%

27%

19% 19%

13%

1%

5% or less >5% to 7% >7% to <10% 10% >10% to <15% 15% >15% to 25% >25%

2010 2011 2012


12.2%

10.0%

12.1%

11.2%

0%

3%

6%

9%

12%

15%

2009 2010 2011 2012

* Escrows established at closing to fund post-closing expenses.

Subset: deals with escrows/holdbacks

1.57%

1.96% 2.01% 2.08%

0.18% 0.25% 0.25% 0.25%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2009 2010 2011 2012

As % of indemnification escrow

As % of transaction value

Median indemnification escrow size Median expense escrow size*

Escrows/Holdbacks as a Percentage of Transaction Value

Indemnification


* Denotes the number of months from closing until the scheduled final escrow release date, disregarding interim releases. The survival period on slide 55 denotes the time available to the parties to make claims for breaches of the agreement, after which indemnification under the agreement will not be available. In most deals these periods are the same, but in some deals the escrow period lasts longer for reasons unique to the deal.

Subset: deals with escrows/holdbacks

Escrow/Holdback Periods*

Escrow period frequency (2012 median: 18 months)

Indemnification

1%

35%

8%

37%

0%

12%

8%

3%

18%

10%

47%

3%

15%

5%

1%

22% 21%

33%

5%

11% 8%

Less than 12 months

12 months >12 to <18 months

18 months >18 to <24 months

24 months >24 months

2010 2011 2012


25% 23%

25%

22%

0%

10%

20%

30%

40%

2009 2010 2011 2012

* Excluding shareholder representative expense escrows. ** Deals may include more than one special escrow.

Subset: deals with separate escrows/holdbacks for specifically identified matters*

59%

15%

7%

7%

7%

7%

7%

4%

4%

0%

0%

0%

0%

0%

Purchase price adjustments

Other

Taxes

Intellectual property matters

Employee compensation

Litigation

Payments to dissenting shareholders


Fraud and willful misrepresentation

Accuracy of closing certificates

Due authority

Capitalization

Regulatory matters

Thid-party consents

Deals with special escrows Frequency of special escrow types

Special Escrows

Indemnification

Subset: 2012 deals with special escrow(s) included**


Dispute Resolution


Included 22%

Not included

78%

* A provision allowing Seller’s pre-closing counsel to represent the selling shareholders after closing in matters relating to the acquisition.

Subset: 2012 deals

Conflict waiver* Waiver of jury trial

Waivers

Dispute Resolution

Included 67%

Not included

33%


* Sample includes ADR provisions that apply to all disputes arising out of the agreement, and does not include ADR provisions limited to specific topics such as purchase price adjustments or earn-outs.

Binding arbitration

94%

Mediation 3%

Mediation then binding

arbitration 3%

ADR Inclusion Type of ADR (subset: general ADR included, 2012)

Alternative Dispute Resolution (“ADR”)*

Dispute Resolution

41%

35%

26%

0%

10%

20%

30%

40%

50%

2010 2011 2012


3% 10%

29%

42% 33%

23%

55% 56% 48%

2010 2011 2012

American Arbitration Association

Judicial Arbitration & Mediation Services

Other*

* “Other” frequently includes the International Chamber of Commerce and the Delaware Court of Chancery.

Subset: deals with general ADR included

Determined by arbitrator

19%

Evenly split 16%

Expenses apportioned

32%

Loser pays 23%

Silent 10%

Institution/rules governing arbitration Who pays arbitration expenses? (2012 deals)

Alternative Dispute Resolution (“ADR”)

Dispute Resolution


Termination Fees


Buyer-favorable

7% Seller-

favorable 5%

Two-way 2%

No fee 86%

* “Transaction value” includes escrowed amounts but does not include potential earn-out consideration.


Type

Termination Fees

Termination Fees

§  The median Seller-favorable termination fee was 12.0% of the transaction value* (average: 13.1%)

§  The median Buyer-favorable termination fee was 3.5% of the transaction value* (average: 3.5%)


Glossary


Glossary §  10b-5

Rule 10b-5 is an SEC rule that prohibits any act or omission resulting in fraud or intentional deceit (scienter) and relied upon by the injured party in connection with the purchase or sale of a security. A “10b-5 Representation” is a catch-all representation in the merger agreement modeled from the SEC rule but without the scienter or reliance requirement, expanding buyer’s ability to claim breach of the agreement.

§  Appraisal rights

The statutory right available in most states to a corporation’s minority shareholders who object to a merger to have a fair price of their stock determined in a judicial proceeding and to require the corporation to repurchase their stock at that price. Appraisal rights are usually not available unless the shareholder meets certain requirements, such as voting against the merger or abstaining from voting.

§  Arbitration A method of alternative dispute resolution whereby a dispute, with the consent of the parties, is submitted to a neutral person or group for a decision. Usually includes a full evidentiary hearing and presentations by attorneys for the parties. The merger agreement may provide that the arbitrator’s decision be binding or non-binding.

§  Basket

The basket is the threshold claim amount that must be reached before the seller becomes liable for the buyer’s losses; it functions in one of three ways. Under a “deductible” basket, the seller is only liable for damages in excess of the threshold amount. If the agreement includes a “first dollar” basket, the seller is liable for all damages once the threshold amount has been reached. A “combination” basket includes a threshold claim amount that is higher than its deductible amount.

§  Cap

The maximum recovery a buyer may obtain for indemnification claims. Many agreements include separate caps for different types of breaches.

§  Closing date

The date on which the transaction is consummated, i.e., the date on which the purchase price is paid and the merger occurs.


Glossary §  Consequential damages

Damages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages, it typically must be shown that the damages were a foreseeable result of the initial act.

§  Covenant Covenants are actions that must be taken or not taken by the parties. In a merger agreement, covenants may require the parties to take actions both before and after the closing.

§  Diminution in value Damages that result from the loss in value to an asset or enterprise. In the context of a merger, it typically refers to a loss that results from a decrease in value due to a breach of the merger agreement.

§  Earn-out

A provision stating that the selling shareholders will obtain additional consideration if the seller or surviving company reaches certain milestones. Examples include revenue targets, receipt of regulatory approvals, etc.

§  Escrow/holdback A portion of the merger consideration that is deposited with a neutral third party (in the case of an escrow) or withheld by the buyer (in the case of a holdback) to be applied towards potential future indemnification claims by the buyer. After a specified period of time (the survival period) any consideration remaining in the escrow or holdback account is released to the selling shareholders.

§  Incidental damages

Damages that are awarded as compensation for the buyer’s commercially reasonable expenses resulting from a breach by the seller. Examples include the costs of handling, shipping, and replacing faulty inventory, costs associated with restatement of the seller’s financials, and the costs associated with bringing the seller into compliance with applicable regulations.

§  Indemnification Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.


Glossary §  Management carveout

A plan put in place to incentivize the seller’s management team or employees to stay with the company until it is sold, often by allocating a portion of the purchase price directly to such employees to be paid before satisfying liquidation-preference overhangs.

§  Mediation A form of alternative dispute resolution where the parties attempt to negotiate a settlement with the assistance of a neutral third party. Unlike arbitration or litigation, the resulting agreement, or lack thereof, is wholly controlled by the parties.

§  Punitive damages

Damages awarded to an injured party that go beyond what is necessary to compensate them for their losses and which are intended to punish the wrongdoing party.

§  Representations and warranties Representations are statements of fact by the seller regarding the condition of its business, covering virtually all aspects of the company. Warranties are the seller’s assurances to the buyer that the representations are true, and that if they are not, the buyer will be entitled to seek legal remedies.

§  Sandbagging

Where a party may seek indemnification for the other party’s breach of the merger agreement even if the non-breaching party had knowledge of the breach prior to closing.

§  Signing date

The date on which the merger agreement is signed by the principal parties. Closing typically, but not always, occurs on a later date.

§  Survival The time period after closing in which the buyer may make a claim against the seller or selling shareholders for breach of their representations, warranties and covenants. The time period is usually shorter than the applicable statute of limitations.


The information herein may not be stripped of any copyright or trademark information or copied, published or used, in whole or in part, for any other purpose than as expressly authorized by SRS. In preparing this study, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of our clients or which was otherwise reviewed by us. The terms of the agreements surveyed for this Study vary widely and are subject to many competing interpretations; the conclusions presented in this Study are therefore subject to important qualifications that are not expressly articulated herein. SRS makes no representations as to, and no party shall be entitled to rely upon, the legal, regulatory, or tax implications of the matters referred to in this study, and neither SRS nor any of its directors, officers, employees or agents shall incur any responsibility or liability whatsoever to any party in respect of the contents of this study or any matters referred to in, or discussed as a result of, this document.

SAN FRANCISCO BOSTON DENVER ISRAEL p. 415.367.9400

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