Certified Merger & Acquisition Advisor Credentialing Program

1. Certified Merger & Acquisition Advisor Credentialing Program 2008 Loyola University Chicago Mergers and Acquisitions: Legal Considerations Presented By: G. William Hubbard Phone: (312) 704-3624 Email: b.h@hbcounsel.com

2. Faculty MemberG. William HubbardHubbard Business Counsel222 N. LaSalle St., Suite 300Chicago, Il 60601312-704-3624b.h@hbcounsel.com • For over 25 years Bill has helped guide clients in the decisions involved with buying, growing, and selling—and financing—companies and the structuring (including tax structuring), pricing, and negotiating of these transactions. Amongst others, the industries in which he has represented clients include: Manufacturing, Technology, Software, Distribution, Service, Banking, Financial Services, Publishing, Construction, Automotive, Mining, Oil and Gas, Real Estate, Entertainment and Health Care.He is a member of the American Bar Association Section of Business Law—Mergers and Acquisitions and Limited Liability Companies Subcommittees, past Co-Chair of the Business Law Subcommittee on Mergers and Acquisitions of the Chicago Bar Association, past Chair of the Illinois CPA Society Mergers and Acquisitions Special Interest Group Task Force, and is a member of the Illinois CPA Society Consulting Services Executive Committee.

3. Amongst other professional activities, he authored two chapters for Mergers and Acquisitions Handbook for Small and Midsize Companies, edited by West and Jones (New York: Wiley, 1997), co-authored a chapter on Illinois/Delaware/Nevada Corporations for an IICLE handbook, authored the Limited Liability Company Management Structures chapter in the LLC and S Corporation Handbook (IICLE, 2008) and has made numerous presentations concerning closely held businesses and mergers and acquisitions. He is a Past President and Board Member of the West Point Society of Chicago. • Bill, who is a C.P.A., graduated from the Illinois Institute of Technology Chicago-Kent College of law (with high honors in 1978) and the United States Military Academy at West Point (1973) • Law and Politics Magazine in connection with Chicago Magazine has recognized Bill as one of Illinois’ Mergers and Acquisitions and Closely Held Business “SuperLawyers.” (“SuperLawyers are the top 5% of the attorneys in each state as chosen by their peers and verified by our independent research. The list of Super Lawyers is based on surveys of more than 47,000 lawyers across Illinois.”)The Illinois Supreme Court does not recognize a lawyer's certifications or specialties, none of which are requisite to the practice of law.

4. Just Documenting a Transaction? • What is Law? • What is Business? • Can they be separated? -- Cases on negotiations and legal considerations (privilege; errors and omissions) • Does it matter for particular purposes?

5. I. Lawyer’s Role A. Identify (and understand) the client, its business, and the various interests, value propositions and risks • Lawyer does not represent “the deal” • Lawyer represents either the buyer or the seller (or sometimes the intermediary) in the deal

6. Quarterback the deal • Identify key business, financing, legal and tax issues early; avoid surprises • For each particular deal, determine the specific value propositions and the risks; no deal is risk free • Focus depends on whether lawyer is representing the buyer or the seller (or the intermediary) • Structure the deal (client, intermediary, CPA, other side) • Manage the process and the mechanics—and the interpersonal dynamics--of the deal

7. C. Seller’s Counsel Prepare Client for the Process of the Deal: Emotions and Timing • Assist in preparing client for the process and coordinate data room and due diligence period • Review and negotiate the letter of intent (or deal points), if applicable • Negotiate the acquisition agreements • Narrow representations and warranties • Allocate risk to the buyer • Find, or collaborate on, solutions to close the deal

8. D. Buyer’s Counsel • Quarterback the deal for the client • Conduct legal due diligence and coordinate other due diligence • Prepare and/or review and negotiate the letter of intent • Draft and negotiate the acquisition agreements • Widen representations and warranties • Allocate risk to the seller • Find solutions to close the deal

9. II. Letter of Intent A. General • Basic terms of the deal have been discussed by buyer and seller at this point; confidentiality agreement • Provides a roadmap for the transaction • Customarily non-binding except for certain protective covenants • When to be used; likely effects • Exclusivity during negotiation

10. B. Framework of the deal • Purchase price/Adjustment to purchase price • Working Capital • Payment terms • Closing date • Assets being purchased and liabilities being assumed (asset purchase transaction) • Refundable/Nonrefundable deposit • Specific conditions to be satisfied prior to (or post) closing • Third party consents • Financing • Performance of Business

11. B. Framework of the deal (continued) • Ancillary agreements • Escrow agreement • Employment agreements • Consulting Agreement • Covenants not to compete • Seller financing agreements • Lease/License • Indemnification agreement • Conduct of the business prior to closing • Expenses/Brokers • Public announcements; disclosure of the terms of the deal

12. C. Protective covenants are binding • Right to have access to the seller’s business and books and records • Confidentiality obligations • “No Shop” Restrictions for a certain period of time • Break up fees

13. III. Legal Aspects of The Deal Structure A. Stock Sale • All assets are (usually) included • All liabilities are (usually) included (known and unknown, contingent or otherwise) • Due diligence, representations and warranties, and indemnification protections are critical • Generally no issues with assignment of critical contracts (other than “change of control” issues)

14. B. Asset Sale • Sale by the corporation of some or all its assets and the assumption by the buyer of certain liabilities • Ability to sell less than all the assets • Ability to limit the assumed liabilities

15. B. Asset Sale (continued) • Certain liabilities may follow the assets even if not expressly assumed • Tort liabilities • Tax liabilities • Environmental liabilities • Product liability • Warranty liabilities • International trade rules,custom, trade cartel, dual use technologies • Specific statutory liabilities (e.g. duty to bargain) • Bankruptcy – fraudulent conveyance; 363; 11

16. C. Section 338(h)(10) Election in a Stock Sale • Treats the selling entity and the buyer as if an asset sale occurred even though a stock sale occurred • Only the buyer and the selling entity are taxed as if an asset sale occurred • Election is made in order to step up the basis of the selling entity’s assets in a stock sale

17. D. Consideration • All cash up front • Deferred purchase price • Stock as a portion of the purchase price • Seller financing • Subordinated security interest in the purchased assets • Pledge of stock in stock purchase • Personal guaranties

18. 16. What kind of basket on indemnification is there, and how big? • What is a basket? • Creates a safety net so that the Seller will not have to pay damages in smaller amounts for breaches of warranties and representations. • Kinds of baskets. • Deductible • . . .no liability until damages reach $50,000, and then only for the amount exceeding $50,000 . . . • Threshold. • . . .no liability until damages reach $50,000, and then for the total of all damages. . .

19. 16. What kind of basket on indemnification is there, and how big? (continued) • Application of basket to specific warranties and representations (carveouts). • Size of basket. • From American Bar Association Committee on Negotiated Acquisitions study on acquisitions of private companies by public companies, most less than $100 million. • 40% of deals had basket of ½% or less of purchase price. • 49% of deals had basket of ½% to 1% of purchase price. • Other studies indicate that smaller deals tend to have a basket with a higher percentage.

20. B. The Hart-Scott-Rodino Act (continued) • Two Tests • Size-of-the-Transaction test • securities and assets valued in excess of $212 million are being transferred • Size-of-the-Person test • one party has $100 million or more in annual net sales or total assets; and • one party has $10 million or more in annual net sales or total assets; and • securities and assets valued in excess of $53 million are being transferred

21. 4. Bureau of Customs and Border Protection (f/k/a U.S. Customs Service) • Import administration and enforcement • 1930 Tariff Act • No ruling on penalties

22. 6. BIS, OFAC, DDTC, and CBP have announced “off the record” that asset purchasers will henceforth be held liable for any past violations of the export or import regulations by the asset seller. Small companies typically receive fines under $100,000. Large corporations, however, often receive much larger fines (or, more commonly, pay the monetary equivalent of such fines in settlement of civil charges), such as the $25 million settlement extracted from Raytheon Company in February 2003 for alleged violations of ITAR.

23. X. Securities Law A. General • “Securities” definition • Stocks • membership and partnership interests • options and warrants • If the security is not exempt, then it must be registered • Either the securities themselves are exempt or the transaction is exempt

24. Restatement (Agency) • Use of Principal’s Property; Use of Confidential Information • An agent has a duty • not to use property of the principal for the agent’s own purposes or those of a third party; and • not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party. HUBBARD BUSINESS COUNSEL

25. Duties of Performance • An agent has a duty to act in accordance with the express and implied terms of any contract between the agent and the principal • Duties of Care, Competence, and Diligence • Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.

26. Duties of Loyalty • Material Benefit Arising Out of Position • An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position. • Acting as or on Behalf of an Adverse Party • An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. • Competition • Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal’s competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship