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M&A process (M&A process ((3) Due diligence (Core areas (Capacity…

- - - - Shares is more common
      - Commercial reasons/accounting treatment/tax consequences
      - Shares - easirer
      - Parties
        
        Purchaser
        
        Seller
        
        Guarantor
  - - - Non-disclosure or confidentiality
        
        Key provisions
        
        Scope of "confidential info"
        
        Protect all info provided but with carve outs
        
        Public domain
        
        Already held
        
        Agreed non-confidential
        
        Received outside the scope of the NDA
        
        Agree not to use or disclose the info except
        
        For purposes of the deal
        
        To those involved in the deal eg employees, advisers
        
        Promise to keep deal nego confidential
        
        Forced disclosure
        
        Duration of obligations
        
        Process for return or destruction of info
        
        Difficult to monitor
        
        Secondary info
        
        No representations / warranties as to accuracy
        
        Non-solicitation of customers / suppliers etc
        
        Remedies
        
        Court order/injunction
        
        Indemnity
        
        Possible duty of good faith
        
        Fixed compensation clause
        
        Damages
      - Letter of intent, MOU, heads of terms, offer letter
        
        Letter of intent
        
        Outline deal terms agreed in principle
        
        Outline deal process and obligations during nego
        
        No standard form or name
        
        Basis to obtain board or regulatory approvals
        
        Help instruct advisers
        
        Nego tool
        
        Framework for some legally binding commitments
        
        Commonly not legally binding
        
        Except for any non-disclosure / exclusivity provisions
        
        Moral force
        
        Possible breach of good faith not to proceed in some jurisdictions
        
        If some provisions intended to be legally binding, ensure that
        
        Provisions are clearly identified
        
        The letter of intent is a valid contract
        
        Provisions survive termination
      - Exclusivity or lock-out
        
        Give the purchaser exclusive nego rights with the seller
        
        Prevent the seller from seeking or nego with others
        
        Operate for fixed period
        
        Stand-alone agreement or part of letter of intent
        
        Legally binding
        
        Usually worded in negative terms ("the seller shall not nego with other parties")
        
        Positive obligation to nego generally not enforceable
        
        Remedies
        
        Court order / injunction
        
        Damages
        
        Possible duty of good faith
        
        Fixed penalty
      - Process letter
      - Break free
      - Standstill agreements
    - - Preparation for sale / tax planning
      - NDA
      - Letter of intent + exclusivity
      - DD
      - Prep and nego of acquisition doc
      - Signing
      - Satisfy pre-conditions
      - Completion
      - Post-completion
  - - - Fully understand target
      - Decision making / bargaining tool
      - Identify risk areas and synergies
      - Help determine structure of acquisition
      - Assist integration of business post-completion
    - - Obtain appropriate legal protection
      - Determine indemnities and other contractual provisions required
      - Identify ancillary documentation
      - Help purchaser understand impact of any disclosures against warranties
    - - Searches: public records
      - Questionnaires
      - Books and records
      - Data room
      - Site visit
      - Managers
    - - Capacity and title
      - Material contracts
      - Employees
      - Pensions
      - IT
      - Data protection
      - IP
      - Competition
      - Funding
      - Licenses
      - Environmental
      - Property
      - Tax
      - Group structure and internal governance
    - - Change of control provisions (shares)
      - Restrictions on assignment (assets)
      - Possible and actual liti
      - Anti-competitive activities / restrictions
      - Third party rights or consent issues
      - Lack of licenses / consents
      - Group issues eg shared employees
      - Seller issues eg assets used in business
      - Restrictive covenants for key employees
    - - Are there current obligations? Is there an exposure / liability?
      - Does it:
        
        Affect title to the assets / shares
        
        Affect the price or pricing mechanism
        
        Undermine the client's reasons for the acquisition
        
        Affect the ability to continue the business
        
        Create a liability
        
        Give rise to criminal sanctions
        
        Impacts on / requires advice from specialists
        
        Impact on our agreed scope and / or fees
      - Remedial action?
        
        eg walk away, price adjustment, indemnity, retention
  - - - Principal contractual document
        
        Parties
        
        Details of target
        
        Consideration and any price adjustment mechanism
        
        Warranties and indemnities
        
        Completion deliverables
      - Shares vs assets
      - Conditional?
      - Guarantor?
      - Other transaction documents
        
        Transitional services agreement
        
        Service agreements
        
        Ancillary documents eg
        
        Board approvals
        
        Forms for filing
        
        Local transfer documents
  - - - Simultaneous signing / completion or gap
      - Acquisition agreement entered into
      - Completion deliverables handed over
      - Board approvals and consents
      - Signatories
      - Notarial or other requirements
- - - - Share purchase / investment
      - Asset purchase
    - - To agree and record the scope of our legal dd exercise and the level of reporting required by out client
      - Key risk management tool - forms part of our engagement process
    - - Part A: background and transaction details
        
        Background to deal / transaction details
        
        Client's objectives
        
        Nature of target / its principal assets
        
        Main areas of risk / liability in target's sector
        
        Sector-specific regulations
        
        Problem / risk areas in target
        
        Foreign elements of exercise
        
        Format of report(s)
        
        Other reports (eg accountants' report, commercial review, etc)
        
        Agreed third party recipients of report(s)
        
        Closure date
      - Part B: scope of review
        
        Aspects to be reviewed (eg commercial contracts, employees, litigation etc)
        
        Materiality thresholds
        
        Degree of importance
        
        Level of reporting
      - Part C: jurisdiction-specific matters
        
        Jurisdiction-specific changes / additional questions
        
        Cross-border deals
    - - Matter pertner to lead
      - Scoping checklist should not be sent to client for completion
      - Initial research
      - Specialist / foreign jurisdiction lawyer input
    - - Scope of review
        
        Engagement letter / scoping checklist
        
        Executive report
      - Terms of review
        
        Set out in executive report
      - Limitations
        
        Engagement letter
        
        Terms of business
        
        Executive report
      - Client acknowledgement letter
    - - Report(s) should not be addressed to third parties
      - Make available on basis of reliance letter
  - - - Instruction memo
      - Information request
        
        Share purchase / investment
        
        Asset purchase
        
        Format
        
        Part A: generic questions
        
        Part B: jurisdiction-specific questions
        
        Must be tailored to:
        
        Target company / business
        
        Relevant industry sector
        
        Agreed scope
        
        Specialist and foreign jurisdiction input
    - - Comprised of appropriate specialists / foreign jurisdiction lawyers
      - Proper instructions / clear reporting lines established
      - Clear leadership and management
    - - DD Manager
        
        Project manage dd exercise
      - Document Manager
        
        Establish / maintain indexed file of dd documents
        
        Monitor circulate responses to info request
        
        Co-ordinate requests for further info (where appropriate)
      - Other Groups
        
        Appropriate level of expertise
    - - "Kick off" meeting / call
        
        To brief team members on dd exercise
        
        To alert members to key issues
    - - Must be issued on every dd exercise
      - Communicates client's objectives
      - Ensures effective internal project / document management
      - Includes:
        
        Transaction details
        
        Background info
        
        Client info / communication protocol
        
        Scope and level of reporting required
        
        Format of reports
        
        Agreed fees and budgetary parameters
        
        Timing of reporting
        
        Document management protocol
  - - - Always produced
      - Significant issues only
      - Format
        
        Part 1: overview of legal bases on which target operates
        
        Part 2: Significant issues and our recommendations
        
        Issue, comment, action, status, jurisdiciton
        
        Part 3: Post-completion actions
        
        Matter, comment, importance, recommended actions, jurisdiction
        
        Sets out scope, bases and limitations of our review
        
        By jurisdictions or specialist area
    - - Separate to executive report
      - Not always produced
      - Use where client requests summary of one or more matters
    - - Step 1 - Identify issues
        
        Report immediately to DD Manager . matter partner
      - Step 2 - Evaluate
        
        Impact on trget
        
        Impact on transaction
      - Step 3 - Recommend actions / solutions
        
        For example, pre-conditions to acquisition; specific indemnities; retention from purchase price; undertakings
    - - Issue of draft written report
        
        Covering email
        
        Progress of review of dd materials
        
        Any important areas for which no info received
        
        Progress against costs estimate
        
        Issues impacting or timing or scope of our review / fee quote
        
        Issue draft client acknowledgement / third party reliance letter
      - Interim issues presentation
  - - - Supplemental report?
    - - Timing
      - Sign-off by specialists / foreign jurisdiction lawyers / matter partner
      - Client acknowledgement / third party reliance letter signed
    - - Demonstrate value of dd exercise
      - Matter partner / DD manager to lead
      - Involve specialists?
      - Focus on significant issues
      - Q&A session
    - - Price adjustment?
      - Address in transaction documents
      - Add to post-completion action list
  - - - Include details in post-completion action list sent to client following completion