Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context

1. Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark

2. Speaker Profile Nicole E. Clark is a Partner in the Corporate section of Vinson & Elkins and focuses on public and private mergers, acquisitions and divestitures; securities offerings; and corporate governance matters. She can be contacted at 713.758.3344 or via email at nclark@velaw.com.

3. Preliminary Agreements • Confidentiality Agreements (CAs) • Standstill Agreements • Exclusivity Agreements • Letters of Intent (LOIs)

4. Preliminary Agreements Practice Tip: • Business people may view preliminary agreements as “standard” or “boilerplate.” • To help avoid unintended consequences, lawyers should get involved early in the transaction.

5. Confidentiality AgreementsBasic Elements • Definition of “confidential information” • Obligation to protect the information • Return of information • Disclaimer of obligation to negotiate/consummate • Disclaimer of warranty • Unilateral vs. bilateral • Definition of “representatives” • Term/integration • Access to employees

6. Confidentiality AgreementsBasic Elements Other possible provisions: • Prohibition on soliciting or hiring personnel • Most-favored nations clause • No clubbing • Standstill (if a public company target) • Exclusivity

7. Definition of Confidential Information • Typically, broadly defined to include all information concerning the business and affairs of seller that will be disclosed to the recipient, including materials prepared by the recipient • Specific identification of confidential information • Exclusions to the definition • Already in possession of recipient • Becomes publicly available (other than through any breach by the recipient of the CA) • Independently developed by recipient • Exception when required by law or court order

8. Definition of Confidential Information • Sensitive information may include: • Trade secrets • Term on confidentiality obligation can thwart required efforts to maintain secrecy • Disclosure to one party can have effect vis-à-vis third parties • Defer disclosure • Buyers should consider having CAs assigned • Consult with IP counsel • Privileged documents • Disclosure may create risk of waiver • Consider discussion among lawyers rather than provision of documents • Consider “common interest” language if disclosure necessary • But note that this language may flag the issue for third parties • Consult with litigation counsel

9. Definition of Confidential Information • Disclosures to competitors may create antitrust risks • Pricing or other competitively sensitive information • Potential approaches: • Exclude sensitive information from disclosures • Identify materials that will not be disclosed • Limit disclosure to recipient’s personnel not in a position to violate antitrust laws • Defer disclosure until late in the process • Avoid mutual exchanges • Be aware that express provision in CA may flag the issue • Consult with antitrust counsel

10. Obligation to protect the information • Limited purpose • “assist the bidder and its representatives in connection with a possible negotiated transaction” • “possible” in order to avoid implication that there is an agreement in principle • “negotiated” in order to reinforce that the company’s purpose is to facilitate a process which it controls and that it would be a breach for bidder to make a hostile bid (if target is a public company) • Agreement not to use the information “in any way detrimental to the Company” • Viewed as broad by recipients

11. Obligation to protect the information • Enforcement • Acknowledgment that money damages are insufficient • Express inclusion of injunctive relief and specific performance (non-exclusive remedy) • Governing law • Consent to jurisdiction of a specific court

12. Return of Information • Return or destroy • At bidder’s or seller’s option? • Bidder may request to have the right to keep one copy (usually by its outside counsel) • Electronic data rooms • Email

13. “Representatives” • Who is covered? • Private equity bidders may be especially sensitive to the inclusion of “affiliates” in definition • Disclosure on a “need to know” basis • Bidder may seek to limit obligations for actions of its representatives • Execution of acknowledgements • “Clubbing” concerns • Definition of representatives may expressly exclude other equity participants; additional provisions may also prohibit clubbing • Definition of representatives may expressly exclude potential lenders unless identified; additional provision may prevent bidders from exclusive use of a debt financing source

14. Term/Integration • Seller’s form may not include any term provision • Bidder will seek to limit (e.g., for 1-2 years) • Consider the type of the information disclosed • Trade secrets – specified term can thwart required efforts to maintain secrecy • Consider varying survival, if warranted • Consider delaying disclosure of the most sensitive information • Integration clause in definitive agreement • CA to be modified or superseded

15. Non-solicit of Employees • Non-solicitation of employees • Generally see 6 months – 2 years • Bidder may want to limit to those introduced through process • Exception for general solicitation or employees laid-off by seller • Non-solicitation clauses that extend to customers and suppliers could be a “back-door” non-compete

16. Most-favored nations clause • Bidder negotiates to receive most preferential terms granted to any other bidder. • Seller will want to retain flexibility to respond to bidders depending upon their individual circumstances. • For example, in the public company context, if a bidder already has commenced a tender offer, the company may agree to a CA without a standstill with such bidder and arguably it should not have to agree to waive its standstill with another bidder merely because the other bidder had obtained a most favored nations clause

17. Standstill (if a public company target) • Agreement by bidder to not pursue an acquisition of the target other than by negotiating with the target’s management and the board for a specified period • Prohibitions on acquisition of target securities • Prohibitions on proxy solicitations • Restrictions on requests for waivers • Advantages for target: • Avoid hostile offer • Greater control over auction process • Avoiding public disclosure • Advantages for bidder: • Access to non-public information

18. Standstill • Bidder may seek to limit the standstill so that it will terminate if a third party proposes to acquire the target • In two recent cases, bidders who had executed a standstill were precluded from making topping bid • Important to note that even if there is not an explicit standstill provision, receipt of material non-public information (for example, projections) and/or limited use clause may restrict bidder from proceeding on a hostile basis

19. Exclusivity Agreements • Agreement by potential seller to deal exclusively with one potential buyer for a specified period of time • Buyer may require before investing a significant amount of time and expense in due diligence and negotiations • Shift in leverage • Seller may desire to negotiate for as many material terms as it can upfront, in exchange for exclusivity, when its leverage is greatest • Buyer may ask for notification of unsolicited offers

20. Letters of Intent • Used to outline the material terms of a proposed transaction • Usually signed by both parties (as opposed to a term sheet) • Almost always intended to be non-binding, except for certain limited terms (such as confidentiality, exclusivity, expenses)

21. Letters of Intent • Advantages to using an LOI • Creates a roadmap • Helps to expose any “deal breakers” • May enhance parties’ commitment/ moral obligation to the deal • Solidifies understanding - helps to avoid “selective memory” • May be useful to buyer in seeking financing • Can help facilitate earlier compliance with regulatory requirements

22. Letters of Intent • Disadvantages • For a public company it may create an obligation to disclose the proposed transaction before the parties would otherwise like • Risk of unintended consequence of being construed as a binding agreement • Pennzoil v. Texaco — $11 billion damage award against Texaco over its tortious interference with Pennzoil’s memorandum of agreement to acquire an interest in Getty Oil • Risk of unintended consequence of having an obligation to negotiate in good faith

23. Letters of Intent Courts found obligation to negotiate in good faith when: • The parties did not state expressly an intention to be bound or not • Party’s reservation of right of approval to its board of directors did not leave it free to abandon the transaction • Language in the LOI • LOI stated that the parties “shall make every reasonable effort to agree upon and have prepared” a contract setting forth the terms and conditions of a merger to be agreed upon • Conduct of the parties after executing the LOI • Court noted that oral assurances, reliance and awareness of reliance was substantial enough to establish a triable claim under promissory estoppel doctrine

24. Letters of Intent • To avoid unintended consequences • Be explicit and precise as to intent to be bound or not • Specify provisions that are binding and precise remedy for breach • If further negotiations are contemplated, a court may find a duty to continue to negotiate in good faith • To avoid uncertainty, parties may choose to affirm this duty or to expressly reject it • State that each party bears its own expenses whether or not definitive agreement is reached • Specify period for future negotiation

25. Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context PLI Doing Deals March 28, 2007 Nicole E. Clark