Drafting Contracts

16 February

• Handout #1: "its/it's."
• Handout #2: Assignment 4.
  • Never precede an open parenthetical with punctuation: ABC Corp., a Delaware corporation (the "Seller"), is blablabla.
  • Not many people created a defined term for the Shares. That might make things simpler.
  • The break-up fee should include the buyer's costs, which means you need to say that both in the part where we say the parties will each bear their own costs, and where the break-up fee is defined.
  • When setting down a financing contingency, might want to include a provision that the money will be available on commercially reasonable terms that the buyer can live with.
  • Note that there was at least one error in one of the source documents. So don't copy blindly, lest you risk embarrassment-- if it doesn't make sense to you, it may be a copy-pasta from earlier days.
  • Instead of listing out all possible items, it might make sense to make a general provision, lest some item get left out.
• Rolling stock: any sort of transportation equipment.
• Next week, we'll be writing Article I of an asset purchase agreement. No assignment this week.
• Acquisition agreements
  It's always helpful to understand what's motivating the parties. Sometimes lowly associates aren't in on the genesis of the deal, but if you can get your boss to explain it to you, it'll help you represent your client's actual position more faithfully.

  For example: is this for personal reasons? estate planning purposes? to get out of an upcoming compliance obligation? to avoid having to invest more in the business? to have a more liquid asset base? to become part of a larger company? because this line of business isn't really a good fit with other things that the party has going on?

  There are lots of reasons, not all of them good. Sometimes there is intense pressure on public companies to increase their earnings per share every year. You can artificially boost those numbers by acquiring someone successful, so that when you fold it into your numbers, it looks like you were more profitable than you were. That's a potentially detrimental focus on the very short term, at least some of the time.

  Anyway, once we've got a deal, the parties' interests generally diverge. They agree that they want to minimize disruptions to the seller, but the seller basically wants to maximize after-tax profits. The seller might worry about the culture of the buyer.

  Sometimes a seller will go through an investment banker to find prospective buyers, or even run an auction for the company. But of course, they'll want a fee.

  Once you've got the agreement in principle, the buyer begins due diligence investigation: material contracts to which the seller's company is a party (will everything have to be renegotiated, will favorable pricing terms evaporate, etc.?).

• Three most common ways to acquire a company:
  1. Merger: all of the transfers of ownership happen by operation of law. You file articles of merger with the secretary of state in the state(s) in which the parties are incorporated. ABC wants to acquire XYZ, let's say. Each company drafts a plan of merger, which says which the surviving entity will be.

     When the merger plan takes effect, by operation of law the ABC+XYZ entity, in the name of ABC (usually) simply assumes all the assets and liabilities of XYZ: title is automatically vested in ABC, etc. And it also specifies what happens to shares of XYZ: do we convert it to stock in ABC, or buy them out in cash, etc. This is a nice simple way to structure an acquisition, unless you're talking about a publicly-held company, because the shareholders have to approve the deal and that's time-consuming and expensive, plus there's the SEC to worry about.

     And note that there are triangular and reverse-triangular mergers (target merges with a subsidiary). Plus, there's something called a "consolidation," in which neither constituent corporation actually survives... this is rare, though.

  2. Asset purchase: you just purchase all of the target company's assets. The two companies don't combine, and the target company is technically still in existence. The target company's board and shareholders have to approve this (rules about selling all assets from Bus Orgs). Anyway, in exchange for title to all the assets, the buyer gives the target some money. The target company has a fat checkbook, and it can wind up its business. The two companies can wrangle about liabilities. And then the target will adopt articles of dissolution/liquidation so it can dividend the shareholders (typically state law sets a schedule for this, lest any unforeseen liabilities crop up). The big deal here is the individual transfers of assets and the individual assumptions of liabilities-- it gets complex.

     So why do things this way? It might be advantageous from a tax perspective (this is usually the reason people pick one structure for a deal), but there are other good reasons. For example, you can cherry-pick what assets you want, plus maybe you don't want all the liabilities (known or unknown) that you'd get via merger, or maybe you don't want the people, just the stuff. So asset purchase is more flexible than merger, because you can pick and choose what you transfer. Buyers buy assets in order to avoid liabilities-- they can't always disclaim all of them, though (courts have found "constructive merger" from time to time, so want to be on the lookout for an asset purchase that looks too much like a merger).

  3. Stock purchase: like we wrote about. Instead of buying all the assets, you can buy all the stock. This accomplishes what you get from a merger (i.e., you get all the liabilities as well), but the target's board of directors can't prevent the shareholders from selling (absent a restrictive stock covenant).

     If the target is a public company, this is a "tender offer" (we are making an offer of $x/share, and this price is contingent on shareholders tendering y% of shares). There are hostile tender offers all the time. Shareholders "vote with their feet:" they say yes or no based on whether the price is favorable or not.

     Sales of stock don't have to be unanimous, either, which is kind of nice, although you might be annoyed to have a minority shareholder: you can kill the deal in that case, or maybe state law will allow you to squeeze them out.

• The choice of what structure to use is generally based on tax issues and successor liability issues. Those three methods laid out above have very different tax consequences for the parties.