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Mergers and
Acquisitions
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Mergers and
Acquisitions
Second Edition
A Step-by-Step Legal and
Practical Guide
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EDWIN L. MILLER JR.
LEWIS N. SEGALL
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LibraryofCongressCataloging-in-PublicationData:
Names:Miller,EdwinL.,author.|Segall,LewisN.,1970–author.
Title:Mergersandacquisitions:astep-by-steplegalandpracticalguide
+website/EdwinL.Miller,Jr.,LewisN.Segall.
Description:Secondedition.|Hoboken,NewJersey:Wiley,2017.|
Series:Wileyfinance|Includesindex.
Identifiers:LCCN2016051178(print)|LCCN2016051981(ebook)|
ISBN9781119265412(hardback)|ISBN9781119276753(pdf)|
ISBN9781119276777(epub)
Subjects:LCSH:Consolidationandmergerofcorporations—Lawand
legislation—UnitedStates.|BISAC:LAW/Mergers&Acquisitions.|
BUSINESS&ECONOMICS/Mergers&Acquisitions.
Classification:LCCKF1477.M552017(print)|LCCKF1477(ebook)|
DDC346.73/06626—dc23
LCrecordavailableathttps://lccn.loc.gov/2016051178
CoverDesign:Wiley
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(bottom)©zffoto/Shutterstock;
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PrintedintheUnitedStatesofAmerica
10987654321
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From Ed:
I dedicate this book to my family—my
extraordinarily tolerant and supportive wife, Barbara;
my son, Russ, who beat me at chess at age 5; and my
daughter, Lindsay, who was one of 150 admitted
to her medical school out of 11,000 applicants.
From Lew:
I also dedicate this book to my family, who could be
an excellent law firm in their own right one day—my
wife, Christian, the best nonpracticing lawyer I
know; Garnett (8), the advocate; Sawyer Jane (12),
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the negotiator; and Harper (13), the mediator.
And Birdie, our Cavalier King Charles,
who keeps us all on our toes.
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Contents
Preface xi
Acknowledgments xv
CHAPTER1
StructuringFundamentals 1
BasicCorporateFinanceConcepts 1
ReasonsforAcquisitions 7
ThreeBasicAcquisitionStructures 11
StructuringConsiderations:Overview 14
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TheAcquisitionProcess 20
Overview 20
ValuationoftheBusiness 27
InvestmentBankEngagementLetters 30
ConfidentialityAgreements 35
LettersofIntent 37
StayBonusesandOtherEmployeeRetentionArrangements 39
BusinessandLegalDueDiligence 42
IntellectualPropertyDueDiligence 55
FromSigningtoClosing 66
Appendixes 67
CHAPTER3
Corporate(Nontax)StructuringConsiderations 69
BusinessObjectivesandOtherNontaxStructuring
Considerations 69
AcquisitionStructureDiagrams 78
FormsofAcquisitionConsideration 78
Debt 83
Cash,Stock,andEarnouts 96
vii
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viii CONTENTS
SuccessorLiabilityandtheDeFactoMergerDoctrine 101
SecuritiesLawCompliance 104
AntitrustCompliance:Hart-Scott-RodinoAct 114
EquityCompensation 120
IncentiveStockOptions 126
EmploymentAgreementsandNoncompetitionCovenants 130
Indemnification 136
EmploymentandBenefitsLaw 138
AcquisitionAccounting 140
RecapitalizationAccounting 144
Appendixes 145
CHAPTER4
TaxConsiderations 146
TaxableVersusTax-FreeTransactions:Overview
ofRelevantSituations 146
DetailedAnalysisofthePositionsoftheTarget
andItsOwnersandoftheBuyer 148
TaxableTransactionsandTheirTaxEffects 150
Tax-FreeTransactions 154
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SpecialSituations 159
GoldenParachuteTax 164
CHAPTER5
TheDefinitiveAcquisitionAgreement 169
EconomicTerms 169
RepresentationsandWarranties 184
Covenants 196
AdditionalAgreements 199
ConditionstoClosing 200
SurvivalofRepresentationsandIndemnification 201
Termination 206
Miscellaneous 206
RepresentingTargets:ASummary 207
Appendixes 210
CHAPTER6
AcquisitionsofPublicCompanies 211
Public-to-PublicMergers:WhatisDifferent? 211
CaseLaw–DevelopedFiduciaryDutiesandStandards
ofReview 214
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Contents ix
EvolutionofFiduciaryDutyCaseLawandJudicialReview 220
SecuritiesLawsandPublicCompanyAcquisitions 237
Anti-TakeoverDevices 247
Appendix 256
CHAPTER7
LeveragedBuyouts(StructuralandTaxIssues)andAcquisitions
ofaTroubledBusiness(Creditors’RightsandBankruptcy) 257
LeveragedBuyouts:StructuralandTaxIssues 257
AcquisitionofaTroubledBusinessGenerally 263
FraudulentTransfers 265
AcquisitionsOutofBankruptcy 272
CHAPTER8
InternationalM&A 282
Cross-BorderAcquisitions 282
CHAPTER9
JointVentures 292
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ReasonsforJointVentures 292
TypesofJointVentures 293
TypicalJointVentureTerms 295
Appendix 304
AbouttheWebsite 305
Index 307
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Preface
T
his book attempts to convey a working knowledge of the principal
business terms, customary contractual provisions, legal background,
andhow-tosapplicabletobusinessacquisitions.Itisnotmeanttobeeither
a traditional law text or a purely business book, but combines elements
ofboth.
Entrepreneurs and other business professionals should have a working
knowledgeofthelegalbasicsoftheirdeals.Thebestbusinesslawyerscoun-
seltheirclientsnotonlyonthelegalframeworkofatransactionbutalsoon
theinterplaybetweenlegalconceptsandbusinessterms.Inasense,thereis
nodistinctionbetweenthem.
Ourhopeisthatreadingthesematerialswillbenefitbusinessownersand
managerswhowanttounderstandmoredeeplytheacquisitionprocessand
themajorcorporate,tax,securitieslaw,andotherlegalparametersofbusi-
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ness acquisitions; lawyers who would like to know, or need a refresher on,
whattheyshouldbediscussingwithclientswhoareeitherbuyingorselling
abusiness;andlaworbusinessschoolstudentswhowanttolearnthelegal
andbusinessfundamentalsofacquisitions,andwhoalsowanttogetajump
onreal-worldacquisitionpractice.Eachchapterconsistsofcommentaryon
what’s really going on in typical situations at each stage, and an in-depth
discussionontheparticularsubject.Theappendixesincludemodelorsam-
pledocumentsforanumberofcommontransactions,aswellasadditional
materials.(AppendixescanbefoundontheWeb.See“AbouttheWebsite.”)
More specifically, this book attempts to do three things. The first is to
survey and explain the principal legal factors that affect the feasibility and
economicconsequencesofacquisitions.Almostalltransactionsarefeasible
inthesensethatitislegallypossibletodothem.Onerareexceptionwouldbe
blockagebytheantitrustauthorities.Itisalsotruethatacquisitionsusually
canbestructuredandimplementedinanumberofdifferentways.Different
structures have different economic consequences to the parties that might
not be initially apparent. The business lawyer and other deal professionals
(investment bankers as well as business development and other personnel)
must devise different structures and implementation schemes and analyze
theeconomicconsequencesofeach.Alongwithfactorsthatarepurelyeco-
nomic, like whether a transaction is taxable, the risks involved in various
approachesalsomustbeanalyzedandexplained.
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xii PREFACE
Given a particular structure, the economic consequences and risks of
a particular transaction are affected by what is called the private ordering
ofthetransaction.Thatmeansthatthebusinessandlegaltermsofatrans-
action can be incorporated into applicable legal documents (e.g., a merger
agreement)inawidevarietyofways.Theexperienceddealprofessionalwill
know the alternatives and, as negotiator, will have the task of getting the
other side to agree to as many provisions as possible that are favorable to
theclient.
Lastly, we discuss some of the policy implications of various rules and
cases, along with some of the academic theory behind them. This informa-
tion is not of great practical value, and not much time is spent on it. Most
academictextbooksandthepressspendahugelydisproportionateamount
of time on the blockbuster deals of the day. Legal practitioners spend huge
amounts of time trying to make sense out of the latest Delaware takeover
case (to the extent that is possible). That is all interesting and important
toknow,butthesecutting-edgetacticsandtheorieshavelittleapplicationto
thelargemajorityofmergerandacquisition(M&A)transactions.Publicand
private deals differ in many respects. Also, in many ways, the business and
legaltermsintheselargepublictransactionstendtobelessvariable—there
is no time for the deal professionals to fiddle around, and the incremental
(cid:2) valueofanimprovementintermsmaybeminisculecomparedtothevalue (cid:2)
of the deal. We do not ignore these issues, but our larger intent is to pre-
parethereaderingreaterdepthfortheacquisitionsthatmakeupthelarge
majorityoftransactions.
So, going back to regulatory and other legal factors, what is the basic
mental legal checklist that a deal professional should run through when
presented with a particular transaction? The principal structuring param-
etersare:
■ Taxlaw(definitelyfirst)
■ Corporatelaw
■ Securitieslaw
■ Antitrustlaw
■ Bankruptcyandinsolvencylaw
■ Accounting
Weexploreeachofthesefactorsindetail.
Different types of acquisition transactions have very different legal
parameters.Thebasictypesofacquisitiontransactionsare:
■ Publiclytradedcompanyacquiresanotherpubliccompanyforstock.
■ Publiclytradedcompanyacquiresanotherpubliccompanyforcash.
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