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20_0208 WilmerHale recognizes its corporate responsibility to environmental stewardship. Attorney Advertising 2020 Report M&A 2020 M&A Report – What’s Inside

2 Market Review and Outlook

5 Takeover Defenses: An Update

8 Antitrust Guidelines for Pre-Closing Activities

9 Law Firm Rankings

10 Selected WilmerHale M&A Transactions

12 Disclosure Considerations in Private Company Mergers

14 A Comparison of Deal Terms in Public and Private Acquisitions

17 Impact of Buy-Side Representation and Warranty Insurance on Deal Terms

18 Trends in VC-Backed Company M&A Deal Terms

20 Initial Public Offerings: A Practical Guide to Going Public 2 Market Review and Outlook

REVIEW Global M&A Activity – 2000 to 2019

# of deals Deal value (in $ billions) With favorable macroeconomic conditions 4,100 59,647 prevailing for much of 2019, high levels 3,807 56,958 56,189 52,777 52,284 50,526 3,495 51,792 52,258 3,579 50,337 of cash among strategic acquirers and 3,412 3,390 3,459 the Federal Reserve Bank cutting interest 47,041 46,742 3,152 41,357 41,702 2,689 2,650 rates three times during the second half 2,485 35,928 2,501 2,539 2,363 2,396 of the year (the first interest rate cuts 30,934 1,823 1,685 since 2008), the number of reported M&A 1,399 20,519 18,586 17,038 transactions and aggregate deal value 16,511 15,625 1,129 1,015 worldwide both increased modestly. The number of M&A transactions worldwide inched up less than 1%, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 from 50,337 deals in 2018 to 50,526 Source: S&P Global Market Intelligence in 2019. Global M&A deal value increased by 2%, from $3.39 trillion in 2018 to $3.50 trillion in 2019. The average deal size in 2019 was $68.5 US M&A Activity – 2000 to 2019 million, up by 2% from $67.3 million in 2018 and just shy of the $68.7 million # of deals Deal value (in $ billions) average deal size in 2015, making it the 23,867 second-highest annual figure since 2008. 23,537 2,522 21,633 20,686 20,944 2,180 20,738 2,170 2,158 The number of worldwide billion-dollar 2,081 19,403 19,767 1,966 18,822 1,938 1,824 1,810 16,456 transactions declined by 6%, from 531 in 15,855 14,724 2018 to 498 in 2019—just under the average 1,360 13,564 1,476 12,480 12,572 11,845 1,380 1,368 of 501 that prevailed during the five-year 10,815 1,187 10,040 1,090 9,010 1,017 period from 2013 to 2017. Aggregate global 873 8,332 888 652 billion-dollar deal value increased by 575 5%, from $2.15 trillion to $2.25 trillion.

GEOGRAPHIC RESULTS 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Deal volume and aggregate Source: S&P Global Market Intelligence deal value trends varied across geographic regions in 2019:

––United States: Deal volume increased European M&A Activity – 2000 to 2019 by 5%, from 19,767 transactions in 2018 # of deals Deal value (in $ billions) to 20,686 transactions in 2019. US deal 22,620 value dipped by 1%, from $2.18 trillion to 2,114 22,230 22,262 22,018 21,494 21,437 20,593 20,255 20,298 19,891 20,054 $2.16 trillion. Average deal size declined 19,510 19,136 by 5%, from $110.3 million in 2018 to 1,695 16,422 1,568 1,565

$104.3 million in 2019—still the third- 1,335 1,378 13,028 1,234 highest annual average since 2007. The 1,158 1,178 1,150 1,153 1,184 1,058 1,104 number of billion-dollar transactions 981 788 7,962 8,165 725 involving US companies decreased by 624 6,621 6,987 543 539 11%, from 340 in 2018 to 302 in 2019, 4,312 while the total value of these transactions remained steady at $1.59 trillion. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

––Europe: The number of transactions Source: S&P Global Market Intelligence in Europe decreased for the fourth consecutive year, by 5%, from 20,054 deals in 2018 to 19,136 deals in 2019. Total deal deal size declined by 10%, from $68.7 from 205 in 2018 to 200 in 2019. The value fell 14%, from $1.38 trillion in 2018 million to $61.9 million. The number total value of billion-dollar transactions to $1.18 trillion in 2019, while average of billion-dollar transactions involving decreased by 16%, from $937.3 billion European companies dropped by 2%, in 2018 to $785.9 billion in 2019. Market Review and Outlook 3

––Asia-Pacific: The Asia-Pacific region Asia-Pacific M&A Activity – 2000 to 2019

saw a 2% increase in deal volume, from # of deals Deal value (in $ billions) 11,332 transactions in 2018 to 11,544 14,851 1,286 transactions in 2019. Total deal value in 14,079 13,929 1,135 the region decreased by 11%, from $912.0 12,269 12,575 11,563 11,307 11,332 11,544 923 billion in 2018 to $810.3 billion in 2019, 10,494 884 912 9,726 810 while average deal size declined by 13%, 8,829 8,775 741 7,912 699 654 663 640 from $80.5 million to $70.2 million. The 6,845 582 559 number of billion-dollar transactions 497 involving Asia-Pacific companies 384 268 2,747 259 2,250 decreased by 5%, from 146 in 2018 to 138 2,0391611,943 119 in 2019, while their total value fell by 20%, 1,048 84 from $513.3 billion to $411.3 billion. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: S&P Global Market Intelligence SECTOR RESULTS

Trends in M&A deal volume and value differed across industry sectors in 2019. Among technology and life sciences Technology M&A Activity – 2000 to 2019 companies worldwide, transaction volume # of deals Deal value (in $ billions) increased, and deal value and average deal size—particularly for life sciences 513 518 7,910 7,533 companies—enjoyed even larger gains. In 7,393 7,218 7,365 480 6,967 6,720 the financial services sector, global deal 6,212 406 6,141 6,108 5,960 396 volume edged down, while deal value 5,869 5,684 5,015 5,139 and average deal size both contracted 4,601 4,459 286 294 271 3,907 250 more severely. In the telecommunications 231 3,307 3,320 200 208 sector, global deal volume increased 184 182 172 166 178 modestly but deal value plummeted by 158 nearly one-half, resulting in a sharp 85 90 decline in average deal size. M&A trends across sectors in the United States were 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 largely consistent with global results. Source: S&P Global Market Intelligence ––Technology: Global transaction volume in the technology sector increased by 5%, from 7,533 deals in 2018 to 7,910 deals in 2019. Global deal value grew by 21%, Life Sciences M&A Activity – 2000 to 2019

from $396.2 billion to $479.7 billion. # of deals Deal value (in $ billions) Average deal size increased by 15%, 1,744 410

from $52.6 million to $60.6 million. US 1,546

technology deal volume saw an uptick of 1,343 1,360 1,293 1,265 295 2%, from 3,349 to 3,420 transactions. At 276 259 1,078 1,080 1,075 1,088 256 257 $386.2 billion, total 2019 US technology 1,036 1,050 1,022 909 deal value was 25% higher than the 872 201 2018 figure of $309.4 billion, resulting 631 149 155 155 543 578 132 130 468 489 121 120 118 in a 22% increase in average deal size, 93 81 86 89

from $92.4 million to $112.9 million. 39 Life Sciences: Global transaction volume –– 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 in the life sciences sector increased by 13%, from 1,546 deals in 2018 to 1,744 Source: S&P Global Market Intelligence deals in 2019, while global deal value surged 59%, from $257.4 billion to million. In the United States, deal billion, resulting in an average deal size $410.1 billion—the highest recorded volume grew by 25%, from 669 to 833 that, at $443.9 million, was 58% higher annual figure. Average deal size jumped transactions. Total deal value almost than the $281.3 million average in 2018. by 41%, from $166.5 million to $235.2 doubled, from $188.2 billion to $369.7 4 Market Review and Outlook

––Financial Services: Global M&A activity Financial Services M&A Activity – 2000 to 2019 in the financial services sector declined by # of deals Deal value (in $ billions) 1%, from 2,841 deals in 2018 to 2,813 deals 3,320 764 3,164 3,065 3,075 in 2019. Global deal value decreased by 2,976 3,033 3,045 3,050 2,906 2,889 2,841 2,759 2,813 27%, from $394.6 billion to $287.7 billion, 596 2,579 541 with average deal size dropping 26%, 2,219

from $138.9 million to $102.3 million. 427 1,702 395 In the United States, financial services 1,594 1,592 380 324 326 340 1,395 313 318 314 304 sector deal volume increased by less than 1,182 280 282 275 276 288 237 1%, from 1,314 to 1,323 transactions, 172 while total deal value declined by 34%, from $261.4 billion to $172.9 billion. Average US deal size decreased by 34%, 20192018201720162015201420132012201120102009200820072006200520042003200220012000 from $198.9 million to $130.7 million. Source: S&P Global Market Intelligence ––Telecommunications: Global transaction volume in the telecommunications sector increased by 11%, from 620 deals in 2018 to 687 deals in 2019. Global Telecommunications M&A Activity – 2000 to 2019 telecommunications deal value fell by # of deals Deal value (in $ billions) one-half, from $188.9 billion to $95.4

billion, resulting in a 55% decrease in 457 1,197 1,215 average deal size, from $304.7 million to 1,089 979 $138.8 million. US telecommunications 935 883 881 858 814 824 deal volume increased by 10%, from 288 769 276 719 736 734 706 706 687 183 to 202 transactions, while total 246 255 621 629 241 620 deal value dropped by 61%, from $116.6 215 205 181 186 178 189 165 billion to $45.0 billion. The average 143 145 110 95 US telecommunications deal size 93 90 82 contracted by almost two-thirds, from $637.4 million to $222.6 million. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 – VC-Backed Companies: The number – Source: S&P Global Market Intelligence of reported acquisitions of VC-backed companies declined by 7%, from 759 quarter of 2020 inflicted an unprecedented ––Private Equity Activity: On the buy side, in 2018 to 708 in 2019. Total reported shock on the economy, stalling growth private equity firms continue to hold proceeds decreased by 5%, from $129.5 and pushing the unemployment rate record levels of “dry powder” to deploy. billion to $123.4 billion—still the to its highest level since the Great In recent years, the abundance of PE third-highest annual figure in history. Depression. Economic uncertainty is capital has intensified deal competition likely to make business projections for and contributed to higher acquisition OUTLOOK potential transactions more challenging prices. On the sell side, PE firms are and less reliable, dampening M&A facing pressure to exit investments and The outlook for the M&A market over the activity in the short- to mid-term. return capital to investors, even if investor coming year is clouded by the impact of returns are dampened by increases in the – Valuations: The start of 2020 saw the the COVID-19 pandemic. While some – level of equity invested in acquisitions. potential acquirers may struggle with the major stock market indices hit record economic fallout of the pandemic and highs before the fallout of the COVID-19 ––VC-Backed Company Pipeline: In the eschew acquisitions, well-funded acquirers pandemic erased many of the gains coming year, the volume of sales of VC- from 2019. The sharp contraction in backed companies will depend in large are likely to see opportunities. Important valuations for some publicly held targets, part on their valuations—which reached factors that will affect M&A activity over especially in sectors disproportionately a record high in 2019—and the health of the balance of 2020 include the following: impacted by the pandemic—such as the IPO market. The disparity between ––Macroeconomic Conditions: The US transportation and travel and leisure— private and public valuations and the economy entered 2020 poised for another may create buying opportunities. poor aftermarket performance of some of strong year, with unemployment and Valuations in more attractive sectors, the most prominent VC-backed IPOs of interest rates at historically low levels. The for both public and private companies, 2019 may make sales more appealing than outbreak of the coronavirus in the first should fare better in the coming year. IPOs for many VC-backed companies. < Takeover Defenses: An Update 5

et forth below is a summary of common majority of the company’s stock but opposed PROHIBITION OF STOCKHOLDERS’ Stakeover defenses available to public by management and the board. In addition, RIGHT TO ACT BY WRITTEN CONSENT companies—both established public opponents believe that supermajority companies and IPO companies—and some requirements—which generally require Should stockholders have the right to act of the questions to be considered by a board votes of 60% to 80% of the total number by written consent without holding a in evaluating these defenses. of outstanding shares—can be almost stockholders’ meeting? impossible to satisfy because of abstentions, Written consents of stockholders can be CLASSIFIED BOARDS broker non-votes and voter apathy, thereby an efficient means to obtain stockholder frustrating the will of stockholders. approvals without the need for convening Should the entire board stand for re-election at each annual meeting, or should directors TRENDS IN TAKEOVER DEFENSES AMONG IPO COMPANIES serve staggered three-year terms, with only one-third of the board standing for re- 2007– 2011– 2007– 2011– 2010 2014 2015 2016 2017 2018 2019 2010 2014 2015 2016 2017 2018 2019 election each year? Supporters of classified, or “staggered,” 80% 76% 78% boards believe that classified boards 88% 75% 74% 75% 84% 85% enhance the knowledge, experience and 81% 68% expertise of boards by helping ensure 76% 77% 62% that, at any given time, a majority of the directors will have experience and Section 203 of the Delaware familiarity with the company’s business. Classified board corporation statute (not opt out)* These supporters believe classified boards promote continuity and stability, which 88% 87% 85% in turn allow companies to focus on 83% 82% long-term strategic planning, ultimately 99% 98% 100% 99% 100% 100% 74% leading to a better competitive position and 91% maximizing stockholder value. Opponents 57% of classified boards, on the other hand, believe that annual elections increase Supermajority voting requirements to approve mergers or change corporate charter and bylaws Blank check preferred stock director accountability to stockholders, which in turn improves director performance, and that classified boards 94% entrench directors and foster insularity. 91% 89% 89% 21% 84% 17% 11% 8% 4% 79% 13% SUPERMAJORITY VOTING 77% 9% REQUIREMENTS Prohibition of stockholders’ What stockholder vote should be required right to act by written consent Multi-class capital structure to approve mergers or amend the corporate charter or bylaws: a majority or a 94% 96% “supermajority”? 90% 90% 97% 97% 94% 96% 78% Advocates for supermajority vote 85% 96% requirements claim that these provisions 88% 49% help preserve and maximize the value of the company for all stockholders by n/a ensuring that important corporate actions Limitation of stockholders’ right to call special meetings Exclusive forum provisions* are taken only when it is the clear will of the stockholders. Opponents, however, believe that majority-vote requirements make the company more accountable to stockholders 4% 97% 99% 97% by making it easier for stockholders to 92% 94% 93% 94% change how the company is governed, and None None None None None None that improved accountability leads to better performance. Supermajority requirements are also viewed by their detractors as Advance notice requirements Stockholder rights plan entrenchment devices used to block *Delaware corporations only initiatives that are supported by holders of a Source: WilmerHale analysis of SEC filings from 2007 to 2019 (2011–2019 only for exclusive forum provisions) for US issuers. 6 Takeover Defenses: An Update

a formal meeting, but can result in a PREVALENCE OF TAKEOVER DEFENSES AMONG IPO COMPANIES single stockholder or small number of AND ESTABLISHED PUBLIC COMPANIES stockholders being able to take action without prior notice or any opportunity IPO ESTABLISHED PUBLIC COMPANIES COMPANIES for other stockholders to be heard. If S&P 500 RUSSELL 3000 stockholders are not permitted to act by Classified board 83% 11% 42% written consent, all stockholder action 21% to 39%, 17% to 56%, must be taken at a duly called stockholders’ Supermajority voting requirements to approve 83% depending on type depending on type mergers or change corporate charter and bylaws meeting for which stockholders have been of action of action provided detailed information about the Prohibition of stockholders’ right to act 86% 70% 74% matters to be voted on, and at which there by written consent is an opportunity to ask questions about Limitation of stockholders’ right to call proposed business. 94% 35% 51% special meetings

LIMITATION OF STOCKHOLDERS’ Advance notice requirements 96% 97% 92% RIGHT TO CALL SPECIAL MEETINGS Section 203 of the Delaware corporation statute 73% 93% 82% Should stockholders have the right to call (not opt out)* special meetings, or should they be required to wait until the next annual meeting of Blank check preferred stock 99% 95% 95% stockholders to present matters for action? Multi-class capital structure 14% 8% 10% If stockholders have the right to call special meetings of stockholders, one or a few Exclusive forum provisions* 90% 43% 49% stockholders may be able to call a special meeting, which can result in abrupt Stockholder rights plan None 1% 2% changes in board composition, interfere with the board’s ability to maximize *Delaware corporations only Source: IPO company data is based on WilmerHale analysis of SEC filings from 2015 to 2019 for US issuers. Established public company data is from FactSet’s stockholder value, or result in significant SharkRepellent database at year-end 2019. expense and disruption to ongoing corporate focus. A requirement that only of director nominations, provide important stockholder and the sale of more than 10% the board or specified officers or directors information about the experience and of the company’s assets. In general, an are authorized to call special meetings of suitability of board candidates. These interested stockholder is any stockholder stockholders could, however, have the effect provisions could also have the effect that, together with its affiliates, beneficially of delaying until the next annual meeting of delaying until the next stockholders’ owns 15% or more of the company’s actions that are favored by the holders of meeting actions that are favored by the stock. A public company incorporated a majority of the company’s stock. holders of a majority of the company’s stock. in Delaware is automatically subject to Section 203, unless it opts out in its original ADVANCE NOTICE REQUIREMENTS STATE ANTI-TAKEOVER LAWS corporate charter or pursuant to a subsequent charter or bylaw Should stockholders be required to notify the Should the company opt out of any state amendment approved by stockholders. company in advance of director nominations anti-takeover laws to which it is subject, Remaining subject to Section 203 helps or other matters that the stockholders would such as Section 203 of the Delaware eliminate the ability of an insurgent like to act upon at a stockholders’ meeting? corporation statute? to accumulate and/or exercise control without paying a control premium, Advance notice requirements provide Section 203 prevents a public company but could prevent stockholders from that stockholders at a meeting may incorporated in Delaware (where more accepting an attractive acquisition offer only consider and act upon director than 90% of all IPO companies are that is opposed by an entrenched board. nominations or other proposals that have incorporated) from engaging in a “business combination” with any “interested been specified in the notice of meeting BLANK CHECK PREFERRED STOCK and brought before the meeting by or at the stockholder” for three years following direction of the board, or by a stockholder the time that the person became an Should the board be authorized to designate who has delivered timely written notice to interested stockholder, unless, among other the terms of series of preferred stock without the company. Advance notice requirements exceptions, the interested stockholder obtaining stockholder approval? afford the board ample time to consider attained such status with the approval of the board. A business combination When blank check preferred stock is the desirability of stockholder proposals includes, among other things, a merger authorized, the board has the right to issue and ensure that they are consistent with or consolidation involving the interested shares of preferred stock in one or more the company’s objectives and, in the case Takeover Defenses: An Update 7

DIFFERENCES IN ANTI-TAKEOVER PRACTICES AMONG TYPES OF IPO COMPANIES of the State of Delaware is the exclusive forum in which stockholders may bring state-law claims against the company and ALL IPO VC-BACKED PE-BACKED OTHER IPO its directors? COMPANIES COMPANIES COMPANIES COMPANIES Numerous Delaware corporations have Classified board 83% 92% 88% 55% adopted exclusive forum provisions, Supermajority voting requirements to following judicial and then legislative approve mergers or change corporate 83% 94% 86% 54% endorsement of the technique. Exclusive charter and bylaws forum provisions typically stipulate that Prohibition of stockholders’ right to act the Court of Chancery of the State of 86% 96% 91% 60% by written consent Delaware is the exclusive forum in which Limitation of stockholders’ right to call internal corporate claims may be brought 94% 98% 97% 82% special meetings by stockholders against the company and its directors. Proponents of exclusive Advance notice requirements 96% 99% 99% 86% forum provisions are motivated by a desire to adjudicate state-law stockholder Section 203 of the Delaware corporation 73% 94% 25% 57% statute (not opt out)* claims in a single jurisdiction that has a well-developed and predictable body of Blank check preferred stock 99% 100% 100% 97% corporate case law and an experienced judiciary. Opponents argue that these Multi-class capital structure 14% 14% 12% 16% provisions deny aggrieved stockholders the ability to bring litigation in a court or Exclusive forum provisions* 90% 91% 92% 79% jurisdiction of their choosing.

Stockholder rights plan None None None None STOCKHOLDER RIGHTS PLANS

*Delaware corporations only Should the company establish a poison pill? Source: WilmerHale analysis of SEC filings from 2015 to 2019 for US issuers. A stockholder rights plan (often referred to as a “poison pill”) is a contractual series without stockholder approval under rights to every stockholder (a “one share, right that allows all stockholders—other state corporate law (but subject to stock one vote” model), some companies go than those who acquire more than a exchange rules), and has the discretion public with a multi-class capital structure specified percentage of the company’s to determine the rights and preferences, under which some or all pre-IPO stock—to purchase additional securities including voting rights, dividend rights, stockholders hold shares of common stock of the company at a discounted price if a conversion rights, redemption privileges that are entitled to multiple votes per share, stockholder accumulates shares of common and liquidation preferences, of each such while the public is issued a separate class stock in excess of the specified threshold, series of preferred stock. The availability of common stock that is entitled to only thereby significantly diluting that of blank check preferred stock can one vote per share, or no voting rights at stockholder’s economic and voting power. eliminate delays associated with a all. Use of a multi-class capital structure Supporters believe rights plans stockholder vote on specific issuances, facilitates the ability of the holders of the are an important planning and strategic thereby facilitating financings and strategic high-vote stock to retain voting control device because they give the board time alliances. The board’s ability, without over the company and to pursue strategies to evaluate unsolicited offers and to further stockholder action, to issue to maximize long-term stockholder value. consider alternatives. Rights plans can preferred stock or rights to purchase Critics believe that a multi-class capital also deter a change in control without preferred stock can also be used as an structure entrenches the holders of the the payment of a control premium to anti-takeover device. high-vote stock, insulating them from all stockholders, as well as partial offers takeover attempts and the will of public and “two-tier” tender offers. Opponents MULTI-CLASS CAPITAL STRUCTURES stockholders, and that the mismatch view rights plans, which can generally between voting power and economic be adopted by board action at any time Should the company sell to the public a class interest may increase the possibility that of common stock whose voting rights are and without stockholder approval, as an the holders of the high-vote stock will entrenchment device and believe that rights different from those of the class of common pursue a riskier business strategy. stock owned by the company’s founders or plans improperly give the board, rather than stockholders, the power to decide management? EXCLUSIVE FORUM PROVISIONS whether and on what terms the company While the majority of companies go public is to be sold. When combined with a with a single class of common stock that Should the company’s corporate charter or bylaws provide that the Court of Chancery classified board, rights plans make an provides the same voting and economic unfriendly takeover particularly difficult. < 8 Antitrust Guidelines for Pre-Closing Activities

he Hart-Scott-Rodino Act (HSR prompted by complaints from customers or parties should be able to achieve most TAct) requires parties to a merger competitors of the parties to the transaction. of their pre-closing goals without undue or acquisition meeting certain size A Second Request can extend the waiting risk of gun-jumping violations. < thresholds—generally, at least $94.0 period for large transactions raising million (as of February 27, 2020)—to significant competitive issues by several INTEGRATION DO’S AND DON’TS report the transaction to the Federal Trade months or more. In 2019, for example, Commission (FTC) and the Department of the average review period for complex Below are general guidelines to avoid alleged Justice (DOJ) and to observe the prescribed transactions was approximately one year. gun-jumping offenses that can result in antitrust violations and closing delays: waiting period. Observance of the HSR The length of the HSR review process waiting period is a significant enforcement DO share only information that is necessary for often creates a tension between the need –– issue at both the FTC and the DOJ. normal due diligence purposes and assessment to observe the HSR requirements and the of future integration. If pricing or other highly need to prepare for the integration of two ANTITRUST WAITING PERIOD sensitive information must be shared, its independent companies. Furthermore, dissemination should be limited to employees Most parties understand that they are in many transactions, particularly those of the other party who need to know and who prohibited from actually closing the involving public companies requiring are not involved in setting prices or making transaction until the HSR waiting period shareholder approval to complete the other competitive decisions for that party. deal, closing may not take place until expires or is terminated. Under the ––DO be alert to actions of the acquirer that antitrust laws, however, the parties must months after HSR approval is received. could be construed as exercising control also understand that they need to act as over the business decisions of the target independent entities until the closing. INTEGRATION PLANNING NEEDS company. The acquirer should not go beyond In their haste to prepare themselves for what is necessary to monitor compliance with In the period between signing an acquisition life post-closing, parties can cross the provisions in the merger agreement requiring agreement and closing a transaction, line between permissible integration the target company to conduct its business in the parties have a legitimate need to planning and impermissible transfer of the ordinary course. Restrictions imposed on prepare to integrate their operations: the target company to protect the investment control. Parties that breach the waiting of the acquirer—relating to significant asset period—through conduct known as “gun- ––The parties want to hit the ground sales, incurrence of significant debt and jumping”—can be charged with violations of running when the transaction closes. similar matters—are considered legitimate. the antitrust laws and find their transaction The ability of the combined company to bogged down in a collateral investigation. compete on day one may depend on the ––DO maintain separate identities. Neither party should change its name to that of the seamless transition of control from the The HSR Act imposes a 30-day moratorium other party or to the contemplated post- target company to the acquirer, without on closing every reportable transaction, closing name of the combined company. disruption to either party’s businesses. while the reviewing agency conducts what DON’T involve the employees of one is typically only a brief review of the HSR –– ––The target company may be concerned party in the decision-making processes of filing. If the transaction appears to raise that its key employees will abandon the other party. There can be significant antitrust concerns, however, the initial the company while the transaction is antitrust implications when one party review may involve analyzing market share pending, thereby potentially reducing is permitted to review and approve data, contacting customers, examining the value of the target company to actions to be taken by the other party. the business plans of the parties, and the acquirer and impairing the target DON’T agree on prices or other terms on interviewing key personnel from the parties. –– company’s operations whether or which products or services are to be sold. If the agency believes that the transaction not the acquisition is completed. The will not “substantially lessen competition,” acquirer has an equally compelling ––DON’T allocate customers or markets between it can either terminate the waiting period interest in preventing the devaluation the parties. For example, parties that compete before the expiration of the 30 days or allow of the business it is about to acquire. for business through bids should continue the waiting period to expire on the 30th day. to bid for customers according to their pre- ––The anticipated benefits from the existing plans. One party should not withdraw If the reviewing agency believes the transaction may diminish if the from a bid opportunity simply because its transaction raises competitive concerns, or if parties are required to wait a long acquisition partner is a competing bidder. more time is needed to investigate properly, period until closing before they can DON’T swap employees or assign the reviewing agency can extend the waiting –– prepare to integrate operations. employees from one party to the other. period by issuing a “Second Request,” which typically involves the production Restrictions on pre-closing activities can ––DON’T assign responsibility for of a substantial amount of additional be frustrating to parties facing an extended the target company’s business to documentation, information and economic HSR review or post-HSR period before the acquirer’s employees. analysis. A Second Request can also be closing. With proper guidance, however, Law Firm Rankings 9

Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2019

The above chart is based on VC-backed companies located east of the Mississippi River. Source: Dow Jones VentureSource

Counsel in Sales of Eastern US VC-Backed Tech and Life Sciences Companies – 2008 to 2019

Technology Life Sciences

.

The above chart is based on VC-backed information technology and life sciences companies located east of the Mississippi River. Source: Dow Jones VentureSource Counsel of Choice for Mergers and Acquisitions Serving industry leaders in technology, life sciences, cleantech, financial services, communications and beyond

Acquisition by Acquisition by Sale of anatomical pathology Acquisition by Acquisition of Acquisition by Acquisition by Acquisition of business to Cisco Systems Astellas Pharma Janrain EG Group Intercontinental Exchange Electro Scientific Industries PHC Holdings $2,600,000,000 Roku $405,000,000 Pending $150,000,000 $125,000,000 Undisclosed (including contingent payments) $685,000,000 $1,000,000,000 $1,140,000,000 (as of May 31, 2020) November 2019 January 2019 October 2019 December 2018 July 2018 February 2019 June 2019

Acquisition of Interface Performance Merger with Nanometrics to form Acquisition by Acquisition by Acquisition of Acquisition of Acquisition of Acquisition of Materials from Acquisition by Onto Innovation Altaris Capital Partners Unity Technologies Noventis Prüftechnik Dieter Busch Ipswitch Syntron Material Handling Group Wind Point Partners Dun & Bradstreet $1,400,000,000 $1,100,000,000 Undisclosed $310,000,000 Undisclosed $179,000,000 $225,000,000 $265,000,000 Undisclosed (enterprise value) June 2018 January 2019 January 2019 July 2019 January 2019 April 2019 August 2018 July 2019 October 2019

Acquisition by Acquisition of Sale of Riverside clinical and Merger with Acquisition by Acquisition by Acquisition of standardized testing business to Acquisition by Vertex Pharmaceuticals Rodin Therapeutics Sprint Aon Group Microsoft $1,000,000,000 Trimble $950,000,000 Agilis Biotherapeutics Alpine Investors $26,500,000,000 (including contingent payments) (including contingent payments) Undisclosed $201,100,000 $200,000,000 $140,000,000 Undisclosed April 2020 April 2020 July 2019 January 2020 November 2019 August 2018 October 2018 January 2020 (regulatory counsel to T-Mobile)

Acquisition and disposition transactions involving Sale of SinglePlatform digital Teem Technologies, Conductor, storefront business to Acquisition by Acquisition of Acquisition of Acquisition by Acquisition of SpaceIQ, Prolific Interactive and TripAdvisor X4 Pharmaceuticals Digital Specialty Chemicals Managed by Q Peak Resorts Sandy Spring Bancorp Galileo Financial Technologies $51,000,000 $165,000,000 $64,500,000 Undisclosed $264,000,000 Undisclosed $1,200,000,000 December 2019 March 2019 March 2019 Various dates 2019–2020 September 2019 January 2020 May 2020 12 Disclosure Considerations in Private Company Mergers

S securities laws impose extensive DISCLOSURE UNDER SECTION 228(e) the context necessary to understand the disclosure requirements on the full consequences of the transaction. U Section 228 of the DGCL allows a announcement, pendency and completion corporation to obtain stockholder approval of public company mergers, and such APPRAISAL DISCLOSURE by written consent in lieu of a meeting, transactions face a high probability of UNDER SECTION 262 including for purposes of a strategic litigation challenging the adequacy of the transaction such as a merger. Once that When a Delaware corporation is a party disclosure. By contrast, the laws applicable written consent has been obtained, Section to a merger, its stockholders are entitled to private company mergers have few express 228(e) requires the corporation to notify to appraisal rights under Section 262 of disclosure requirements, and litigation the stockholders that did not consent to the DGCL, and the corporation must regarding the disclosure in such transactions the approved actions, but says very little notify its stockholders of those rights. remains relatively rare. For this reason, about the contents of the notice itself. The As with Section 228(e), the Delaware stockholder disclosure in private company only substantive disclosure requirement appraisal statute includes very few explicit mergers often receives less attention in Section 228(e) is that “[p]rompt notice disclosure requirements for the required than in public company transactions. of the taking of the corporate action notice. Section 262(d) requires only that: The fact that stockholder disclosure in without a meeting by less than unanimous – the corporation notify its stockholders private company deals often occurs after the – written consent shall be given to those that appraisal rights are available; transaction has been approved (and, in some stockholders or members who have not cases, consummated) can make disclosure consented in writing.” The statute says ––a copy of the appraisal statute be seem like even more of an afterthought. nothing about the requisite contents of included with such notice; However, not all disclosure obligations the notice, and the Delaware courts have ––if the merger or consolidation arise from specific statutory requirements. not specified the precise parameters of has been approved prior to such Any time a company communicates with disclosure required by Section 228(e). its stockholders, those communications are notice, the corporation notify its Nonetheless, whenever the board of subject to the fiduciary duties of the board of stockholders of such approval; and directors communicates with a corporation’s directors, and those duties can impose broad stockholders, the board’s fiduciary duties ––if the merger or consolidation has disclosure requirements that apply with require it to communicate honestly. When been consummated prior to such equal force to public and private companies. directors disclose that an action has been notice, the corporation notify its Consequently, although private transactions taken by written consent under Section stockholders of the effective date are less likely to generate disclosure 228, they have an obligation to provide the of the merger or consolidation. challenges, they are still susceptible to stockholders with an accurate, full and fair many of the same disclosure claims that However, when the board requests characterization of the events disclosed. have become ubiquitous in public deals. stockholder action (rather than notifying This duty includes avoiding omissions them of an action that has already occurred), In a typical private company merger, that would make the disclosure materially it has a heighted disclosure obligation under the target will arrange for a controlling misleading. In some cases, this may not its fiduciary duties and must provide the group of stockholders to approve the translate into a significant burden. stockholders with all material information transaction by written consent immediately In the case of minor housekeeping actions, within its control. The Delaware courts after it is approved by the board and the for example, a Section 228(e) notice often have concluded that an appraisal notice merger agreement is executed. In this fact consists of little more than the resolutions constitutes a request for action because it pattern, there are two statutory disclosure passed by the majority stockholders. In the asks stockholders to make an investment requirements: (1) the company must case of a strategic transaction, however, decision of whether to accept the merger provide a notice under Section 228(e) of more is generally required. The corporation consideration or demand appraisal. As the Delaware General Corporation Law should inform stockholders not only of the a result, the disclosure requirements (DGCL) informing stockholders that action taken, but also its practical effect. associated with an appraisal notice are did not vote on the transaction that the This includes any pricing associated with significantly broader than those arising with merger has been approved, and (2) the the transaction, the nature of the benefits a notice required only by Section 228(e). company must provide the appraisal rights associated with the transaction and the notice required under Section 262 of the Materiality in this context is judged by identity of the participants upon whom DGCL. In each case, the express disclosure a standard roughly equivalent to that those benefits are bestowed (particularly requirements of the applicable statute are used under US securities law. A fact is if some participants, such as directors minimal. However, under both Section material if there is a substantial likelihood or management, receive benefits that are 228(e) and Section 262, the Delaware courts that a reasonable stockholder would different than those conferred upon the have imposed more expansive disclosure consider the fact important in his or her common stockholders). The board of obligations through their interpretation of decision-making process. An omitted directors should ensure that the notice the fiduciary duties of the board of directors. fact is not material simply because it provides the minority stockholders with might be helpful. Instead, there must be a Disclosure Considerations in Private Company Mergers 13 substantial likelihood that the omitted fact the board’s decision-making process, Many of the cases elaborating on the would significantly alter the total mix of often referred to as the “background” materiality standard for fiduciary disclosure information provided. Numerous Delaware section, as well as the reasons why obligations involve a document that served cases have interpreted this standard as it the board approved the transaction. as both a proxy statement and appraisal applies to various types of information. In a public company transaction, the notice, and it is not always clear whether a Based on these cases, there are background section typically includes a standard is being articulated for appraisal several categories of information that detailed description of the negotiations disclosure specifically. While there may a target company should consider and board deliberations leading up to the be circumstances where it is possible to including in an appraisal notice (in signing of the merger agreement. This argue that materiality should be judged addition to the information required description is usually less granular in differently from the perspective of a vote with a Section 228(e) notice): private company disclosure documents, versus an appraisal decision, there are generally reflecting the absence of SEC multiple cases suggesting that Delaware ––Merger Agreement: A copy of the merger requirements for private acquisitions and courts do not distinguish between these agreement approved by the board. a less conservative approach to defensive two contexts when assessing materiality. ––Instructions for Demanding Appraisal: disclosure given the significantly lower Also, target companies often use the The instructions should be sufficient risk of litigation in private transactions. appraisal notice to continue soliciting to enable a reasonable stockholder to ––Conflicts of Interest: Conflicts of interest stockholder consents either (1) to maximize perfect his or her appraisal rights. that could influence the decision making the number of stockholders that waive appraisal rights (which may be necessary – Financial Statements: Financial of directors and members of senior – to reach a minimum threshold required statements or comparable financial management will likely be deemed under the merger agreement), or (2) to data are an important component material. In addition, if the target approve “golden parachute” compensation of an appraisal notice. There is no engages a financial advisor (particularly for the purpose of satisfying Section bright-line rule for the periods if the board relies on the advisor’s 280G of the Internal Revenue Code. This required, but it is advisable to provide advice regarding valuation), disclosure means an appraisal notice may still be both current and historic financial of conflicts of interest involving the soliciting stockholder votes, even though information, to the extent available. financial advisor may also be required. This often includes the amount and the requisite approval to consummate the ––Description of the Company’s Business structure of the financial advisor’s fee, transaction has already been obtained. and Prospects: Providing a short especially if the amount is material Even if this is not the case, it is prudent to description of the target’s business is and structured in a manner that assume that materiality determinations generally a straightforward exercise, incentivizes support for a transaction, in the context of proxy statements will but determining the nature and degree as well as any material relationships generally apply to appraisal notices as well. of the required disclosure regarding its between the financial advisor and The fact that Delaware law does not prospects is less so. Numerous cases other parties to the transaction. distinguish between the fiduciary duties have considered whether the board’s of boards of directors of public and private Valuation Information: In some fiduciary duties require disclosure of –– companies does not mean that private circumstances, Delaware courts have financial projections and reached different companies need to emulate the voluminous concluded that the valuation methodology results depending on the circumstances. disclosure documents produced in public used to determine or evaluate the merger Although the cases arguably do not reflect company transactions. Some of this consideration should be disclosed. This a consistent standard, it is probably safe disclosure is dictated by SEC requirements may not be required if the acquisition to conclude that the board is not obligated that do not apply to private transactions, price was determined through a bidding to produce projections where none and some is prophylactic to reduce the scope process without reference to a separate exist, or to disclose existing projections of disclosure claims in the lawsuits that are valuation assessment, but if the board that it has reasonably determined inevitable in public company transactions obtains a fairness opinion from its are unreliable or stale. However, if and frequently of dubious merit. However, financial advisor, that opinion and a projections were relied on by the board disclosure claims are also brought in private summary of the underlying financial or its financial advisor, particularly for transactions from time to time, and as analyses (including key assumptions the purpose of performing a valuation private companies increasingly defer the and implied valuation ranges) should analysis used by the board in evaluating decision to go public and become larger, the be disclosed. In addition, if minority the transaction, it is likely they will be frequency of disclosure claims in private stockholders are being squeezed out considered material. This is particularly transactions may increase. Thus, it is by a majority holder in a short-form true if the projections were used in the important for those preparing disclosure in merger, the methodology used to analysis supporting a fairness opinion. the context of a private company merger to determine the price paid to the minority remain mindful of the disclosure standards ––Background and Reasons: The appraisal will likely be deemed material. established in public company practice. < notice should include a description of 14 A Comparison of Deal Terms in Public and Private Acquisitions

ublic and private company from the process followed in a SEC INVOLVEMENT M&A transactions share many private company acquisition: P The SEC plays a role in acquisitions characteristics, but also involve different Availability of SEC Filings: Due diligence involving a public company: rules and conventions. Described below –– typically starts with the target’s SEC are some of the ways in which acquisitions filings—enabling a potential acquirer to ––Form S-4: In a public acquisition, if of public and private targets differ. investigate in stealth mode until it wishes the acquirer is issuing stock to the to engage the target in discussions. target’s stockholders, the acquirer must GENERAL CONSIDERATIONS register the issuance on a Form S-4 ––Speed: The due diligence process registration statement that is filed with The M&A process for public and is often quicker in an acquisition (and possibly reviewed by) the SEC. private company acquisitions of a public company because of the – Stockholder Approval: Absent a tender differs in several respects: availability of SEC filings, thereby – allowing the parties to focus quickly offer, the target’s stockholders, and ––Structure: An acquisition of a private on the key transaction points. sometimes the acquirer’s stockholders, company may be structured as an must approve the transaction. Stockholder asset purchase, a stock purchase or a MERGER AGREEMENT approval is sought pursuant to a proxy merger. A public company acquisition statement that is filed with (and often is generally structured as a merger, The merger agreement for an reviewed by) the SEC. Public targets often in combination with a tender acquisition of a public company seeking stockholder approval generally offer for all-cash acquisitions. reflects a number of differences from must provide for a separate, non-binding stockholder vote with respect to all Letter of Intent: If a public company is the its private company counterpart: –– compensation each named executive target in an acquisition, there is usually ––Representations: In general, the officer will receive in the transaction. no letter of intent. The parties typically go representations and warranties from a Tender Offer Filings: In a tender offer for straight to a definitive agreement, due in public company are less extensive than –– a public target, the acquirer must file a part to concerns over creating a premature those from a private company, are tied Schedule TO and the target must file a disclosure obligation. Sometimes an in some respects to the public company’s Schedule 14D-9. The SEC staff reviews unsigned term sheet is also prepared. SEC filings, may have higher materiality and often comments on these filings. ––Timetable: The timetable before signing thresholds, and do not survive the closing. the definitive agreement is often more ––Exclusivity: The exclusivity provisions ––Public Communications: Elaborate compressed in an acquisition of a are subject to a “fiduciary exception” SEC regulations govern public public company. However, more time permitting the target to negotiate with communications by the parties in may be required between signing and a third party making an offer that may the period between the first public closing to prepare and file disclosure be deemed superior and, in certain announcement of the transaction documents with the SEC, comply with circumstances, to change the target and the closing of the transaction. notice and timing requirements, and board’s recommendation to stockholders. ––Multiple SEC Filings: Many Form obtain antitrust clearances that may ––Closing Conditions: The “no material 8-Ks and other SEC filings are often be unnecessary (or easier to obtain) in required by public companies that smaller, private company acquisitions. adverse change” and other closing conditions are generally drafted so as are party to M&A transactions. ––Confidentiality: The potential damage to limit the target’s closing risk and from a leak is much greater in an give the acquirer little room to refuse to Set forth on the following page is a comparison M&A transaction involving a public complete the transaction if regulatory of selected deal terms in public target and private company, and accordingly rigorous and stockholder approvals are obtained. confidentiality precautions are taken. target acquisitions, based on the most recent ––Post-Closing Obligations: Post- studies available from SRS Acquiom (a provider ––Director Liability: The board of a public closing escrow or indemnification of post-closing transaction management services) target will almost certainly obtain a arrangements are extremely rare. fairness opinion from an investment and the Mergers & Acquisitions Committee of the – Earnouts: Earnouts are unusual, banking firm and is much more – American Bar Association’s Business Law Section. although a form of earnout arrangement likely to be challenged by litigation The SRS Acquiom study covers private target called a “contingent value right” is not alleging a breach of fiduciary duties uncommon in the life sciences sector. acquisitions in which it served as shareholder or the failure to disclose material representative and that closed in 2019. The ABA information related to the transaction. – Deal Certainty and Protection: The – private target study covers acquisitions that negotiation battlegrounds are the were completed in 2018 and the first quarter of DUE DILIGENCE provisions addressing deal certainty (principally the closing conditions) 2019, and the ABA public target study covers When a public company is acquired, and deal protection (exclusivity, voting acquisitions that were announced in 2016 the due diligence process differs agreement, termination and breakup fees). (excluding acquisitions by private equity buyers). A Comparison of Deal Terms in Public and Private Acquisitions 15

COMPARISON OF SELECTED DEAL TERMS ––Fiduciary Exception to “No-Shop/ ––Appraisal Rights Closing Condition: No-Talk” Covenant: Whether the “no- Whether the acquisition agreement The accompanying chart compares the shop/no-talk” covenant prohibiting contains a closing condition providing following deal terms in acquisitions the target from seeking an alternative that appraisal rights must not have been of public and private targets: acquirer includes an exception sought by target stockholders holding ––“10b-5” Representation: A representation permitting the target to consider an more than a specified percentage to the effect that no representation unsolicited superior proposal if required of the target’s outstanding capital or warranty by the target contained to do so by its fiduciary duties. stock. (Under Delaware law, appraisal in the acquisition agreement, and no rights generally are not available to ––Opinion of Target’s Counsel as Closing statement contained in any document, stockholders of a public target when Condition: Whether the acquisition certificate or instrument delivered by the merger consideration consists agreement contains a closing condition the target pursuant to the acquisition solely of publicly traded stock.) requiring the target to obtain an opinion agreement, contains any untrue statement of counsel, typically addressing the ––Acquirer MAC/MAE Closing Condition: of a material fact or fails to state any target’s due organization, corporate Whether the acquisition agreement material fact necessary, in light of the authority and capitalization; the contains a closing condition excusing circumstances, to make the statements in authorization and enforceability the acquirer from closing if an event or the acquisition agreement not misleading. of the acquisition agreement; and development has occurred that has had, ––Standard for Accuracy of Target whether the transaction violates the or could reasonably be expected to have, Representations at Closing: The target’s corporate charter, bylaws or a “material adverse change/effect” on standard against which the accuracy applicable law. (Opinions regarding the the target. Requiring the target’s MAC/ of the target’s representations and tax consequences of the transaction MAE representation to be “brought warranties set forth in the acquisition are excluded from this data.) down” to closing has the same effect. agreement is measured for purposes of the acquirer’s closing conditions (sometimes with specific exceptions): Fiduciary Exception to “10b-5” Representation • A “MAC/MAE” standard provides “No-Shop/No-Talk” Covenant that each of the representations PUBLIC (ABA) 1% PUBLIC (ABA) 100% and warranties of the target must PRIVATE (ABA) 17% PRIVATE (ABA) 4% be true and correct in all respects as of the closing, except where the PRIVATE (SRS ACQUIOM) 26% PRIVATE (SRS ACQUIOM) 3% failure of such representations and Standard for Accuracy Opinion of Target’s Counsel warranties to be true and correct of Target Representations at Closing as Closing Condition will not have or result in a material PUBLIC (ABA) PUBLIC (ABA) – adverse change/effect on the target. “MAC/MAE” 99% PRIVATE (ABA) 3% “In all material respects” • An “in all material respects” standard None PRIVATE (SRS ACQUIOM) 8% provides that the representations Other standard 1% and warranties of the target must Appraisal Rights Closing Condition be true and correct in all material PRIVATE (ABA) respects as of the closing. “MAC/MAE” 67% PUBLIC (ABA) “In all material respects” 32% All cash deals 4% • An “in all respects” standard provides “In all respects” 2% Part cash/part stock deals 11% that each of the representations and warranties of the target PRIVATE (ABA) PRIVATE (SRS ACQUIOM) must be true and correct in all All deals 44% “MAC/MAE” 48% respects as of the closing. “In all material respects” 50% PRIVATE (SRS ACQUIOM) 57% ––Inclusion of “Prospects” in MAC/MAE “In all respects” 2% All deals Definition: Whether the “material Inclusion of “Prospects” Acquirer MAC/MAE Closing Condition adverse change/effect” definition in in MAC/MAE Definition the acquisition agreement includes PUBLIC (ABA) None PUBLIC (ABA) 100% “prospects” along with other target metrics, such as the business, assets, PRIVATE (ABA) 10% PRIVATE (ABA) 97% properties, financial condition and PRIVATE (SRS ACQUIOM) 15% PRIVATE (SRS ACQUIOM) 97% results of operations of the target. 16 A Comparison of Deal Terms in Public and Private Acquisitions

TRENDS IN SELECTED DEAL TERMS period of time to seek a better deal after signing an acquisition agreement, POST-CLOSING CLAIMS The ABA deal-term studies have been appeared in 2% of acquisitions SRS Acquiom has released a study analyzing published periodically since 2004. announced in 2016 (similar to the 3% A review of past ABA studies identifies post-closing claim activity in over 1,000 of acquisitions announced in 2007, private target acquisitions in which it served the following trends, although in any but down from 11% in 2013). as shareholder representative from 2014 particular transaction negotiated outcomes through the second quarter of 2018. This study may vary (not all metrics discussed ––Appraisal Rights Closing Condition: provides a glimpse into the hidden world of below were reported for all periods): The frequency of an appraisal rights post-closing claims in private acquisitions: closing condition has dropped from 13% In transactions involving public Frequency of Claims: 40% of all transactions of cash deals announced in 2005–2006 –– had at least one post-closing indemnification company targets: to 4% of cash deals in 2016. Among claim (excluding purchase price adjustments) ––“10b-5” Representations: These cash/stock deals, an appraisal rights against the escrow. Claim frequency increased representations, whose frequency closing condition appeared in 11% of with transaction value, from 28% of deals had fallen steadily from a peak of acquisitions announced in 2016, less valued at $50 million or less, to 55% of deals 19% of acquisitions announced in than half the 28% figure in 2005–2006. valued in excess of $500 million. Claims 2004, were present in only 1% of were most likely in deals with financial In transactions involving private acquisitions announced in 2016. buyers (49% of transactions) and least likely company targets: in deals with US private buyers or foreign – Accuracy of Target Representations buyers (37% of transactions in each case). – ––“10b-5” Representations: The prevalence at Closing: The MAC/MAE standard of these representations has declined ––Size of Claims: Median claim size remains almost universal, present in from 59% of acquisitions completed in (excluding purchase price adjustments) as 99% of acquisitions announced in 2004 to 17% of acquisitions completed a percentage of the escrow ranged from a 2016 compared to 89% of acquisitions high of 127% for fraud claims to a low of in 2018 and the first quarter of 2019. announced in 2004. In practice, this 1% for capitalization claims. On average, trend has been offset to some extent by ––Accuracy of Target Representations at claim size as a percentage of the escrow the use of lower standards for specific Closing: The MAC/MAE standard has was highest on deals valued at $50 million representations, such as those relating gained much wider acceptance, appearing or less and on deals with financial buyers, and lowest on deals valued in excess of $200 to capitalization and authority. in 67% of acquisitions completed in 2018 million and on deals with US public buyers. and the first quarter of 2019, compared to Inclusion of “Prospects” in MAC/MAE –– 37% of acquisitions completed in 2004. ––Subject Matter of Claims: Among all Definition: The target’s “prospects” were claims, the subject matter consisted of not included in the MAC/MAE definition ––Inclusion of “Prospects” in MAC/MAE breaches of representations and warranties in any acquisitions announced in 2016, Definition: The target’s “prospects” (49%), purchase price adjustments representing a sharp decline from 10% appeared in the MAC/MAE definition (28%), transaction fees/costs (20%), of the acquisitions announced in 2004. in 10% of acquisitions completed in 2018 appraisal rights (1%) and fraud (1%). and the first quarter of 2019, down from Bases for Misrepresentation Claims: Fiduciary Exception to “No-Shop/No- –– –– 36% of acquisitions completed in 2006. Most frequently claimed misrepresentations Talk” Covenant: The fiduciary exception involved tax (45%), capitalization (12%), in 97% of acquisitions announced in ––Fiduciary Exception to “No-Shop/ employee-related (11%), undisclosed liabilities 2016 was based on the concept of “an No-Talk” Covenant: Fiduciary (9%), intellectual property (8%), financial acquisition proposal reasonably expected exceptions were present in only 4% of statements (7%), regulatory compliance to result in a superior offer” (up from acquisitions completed in 2018 and the (3%) and customer contracts (3%). 79% in 2004), while the standard based first quarter of 2019, compared to 25% ––Resolution of Claims: Contested claims were on the mere existence of any “acquisition of acquisitions completed in 2008. resolved in a median of 2.1 months. Regulatory proposal” was present in 3% of claims took the most time to be resolved – Opinion of Target Counsel: Legal opinions acquisitions announced in 2016 (down – (median of 13 months), while fraud claims were (excluding tax matters) of the target’s from 10% in 2004). The standard based resolved the quickest (median of one month). counsel have plummeted in frequency, on an actual “superior offer” fell from 11% from 73% of acquisitions completed in ––Purchase Price Adjustments: 82.5% of all in 2004 to just 1% in 2016. In practice, 2004 to just 3% of acquisitions completed transactions had mechanisms for purchase these trends have been partly offset by in 2018 and the first quarter of 2019. price adjustments. Of these, 74% had a an increase in “back-door” fiduciary post-closing adjustment (favorable to the exceptions, such as the “whenever ––Appraisal Rights Closing Condition: buyer in 42% of transactions and favorable to fiduciary duties require” standard. An appraisal rights closing condition target stockholders in 32% of transactions). was included in 44% of acquisitions ––“Go-Shop” Provisions: “Go-shop” ––Expense Fund: Median size of $200,000 completed in 2018 and the first quarter (0.24% of transaction value). provisions, granting the target a specified of 2019, down from 57% in 2008. < Impact of Buy-Side Representation and Warranty Insurance on Deal Terms 17

uyers or sellers of companies can present, with a median size of just 1%, effect is the seller-favorable “would Bpurchase representation and warranty compared to 10% in other deals. be” formulation in 85% of deals and insurance (R&W insurance) to provide the “could be” formulation in 13% of Deals with buy-side R&W insurance coverage for indemnification claims arising –– deals. Among other deals, 71% use are more likely than other deals to from the seller’s misrepresentations. the “would be” formulation and 18% contain a purchase price adjustment The use of R&W insurance has grown use the “could be” formulation. in recent years, particularly in sales mechanism (by a margin of 95% to 74%), with a strong preference to rely of privately held companies backed by LOSS MITIGATION AND SETOFFS venture capital or private equity investors. on a separate escrow to secure the As with other forms of insurance, R&W purchase price adjustment (79% of ––When buy-side R&W insurance is insurance policies have deductibles, deals with buy-side R&W insurance, present, the acquisition agreement coverage limits, exclusions and policy compared to 34% of other deals). is more likely than in other deals to periods. Premiums typically range require the buyer to mitigate losses (by a from 2% to 4% of the coverage limit. REPRESENTATIONS AND WARRANTIES margin of 75% to 49%) and offset losses against any recovery from insurance The presence of R&W insurance in a A “10b-5” or “full disclosure” –– (by a margin of 90% to 86%) or tax private company sale influences the representation—to the effect that the benefits (by a margin of 46% to 31%). negotiated outcomes of various provisions seller’s representations and warranties are in the acquisition agreement, most complete, accurate and not misleading—is ––Among deals with earnouts, 59% notably the seller’s representations and absent from 91% of deals with buy-side involving buy-side R&W insurance warranties and liability provisions. R&W insurance, compared to 61% of expressly permit buyers to offset Below is a summary of the principal effects other deals. Similarly, provisions to indemnification claims against on transaction terms when buy-side R&W the effect that the seller is making no future earnout payments, compared insurance is present, based on an analysis representations except as set forth in to 83% of other deals, and 27% of conducted by SRS Acquiom of 642 private- the acquisition agreement are more deals with buy-side R&W insurance target acquisitions that closed from 2016 likely to be present in deals with expressly prohibit such offsets, through 2018, in which SRS Acquiom buy-side R&W insurance than other compared to only 3% of other deals. provided professional and financial deals (by a margin of 94% to 68%). – In deals with buy-side R&W insurance, services. In its study, called the 2019 – “Pro-sandbagging” (or “benefit of the seller’s indemnification obligations Buy-Side Representations and Warranties –– the bargain”) provisions, allowing are more likely to be structured as a Insurance (RWI) Deal Terms Study, SRS a party to seek indemnification for “deductible basket,” in which the seller Acquiom noted that the reported effects of the other party’s misrepresentations is liable only for damages in excess of a buy-side R&W insurance on deal terms are even if the non-breaching party knew specified threshold amount (75% of deals), likely understated due to data limitations. of the misrepresentations prior to than a “tipping basket,” in which the seller DEAL CHARACTERISTICS closing, are present in 29% of deals is liable for all damages once the threshold involving buy-side R&W insurance, amount has been reached (13% of deals). ––Buy-side R&W insurance is more compared to 59% of other deals. By contrast, in other deals, the seller’s common in larger deals. In the indemnification obligations are structured “Materiality scrapes” appear in 96% of study’s sample, the median size of –– as a “deductible basket” in 41% of deals deals with buy-side R&W insurance transactions with buy-side R&W and as a “tipping basket” in 54% of deals. insurance was $135 million, compared and 87% of other deals, but deals with buy-side R&W insurance are twice to $60 million in other transactions. DISPUTE RESOLUTION as likely to provide that materiality ––Among deals involving publicly held qualifications in representations and ––A conflict waiver provision allowing buyers, the less leverage the buyer warranties are disregarded for purposes of the sell-side law firm to represent the has relative to the seller (measured determining both breaches and damages. seller post-closing is present in 86% of by the ratio of the buyer’s market deals with buy-side R&W insurance, ––The acquisition agreement is less capitalization to the transaction value), compared to 56% of other deals. the higher the probability that the likely to require the seller to notify buyer will purchase R&W insurance. the buyer of pre-closing breaches of ––The parties specify an alternative dispute representations and warranties when resolution mechanism in only 13% of FINANCIAL TERMS buy-side R&W insurance is present deals with buy-side R&W insurance, (56%) than in other deals (80%). compared to 28% of other deals. ––Indemnification escrows are significantly smaller (or eliminated entirely) ––In deals with buy-side R&W insurance, ––The parties waive jury trials in 95% of when buy-side R&W insurance is the forward-looking language in the deals involving buy-side R&W insurance, definition of material adverse change/ compared to 74% of other deals. < 18 Trends in VC-Backed Company M&A Deal Terms

e reviewed all merger transactions between 2012 and 2019 involving venture-backed targets (as reported in either Dow Jones WVentureSource or Pitchbook for 2019 or in Dow Jones VentureSource for years prior to 2019) in which the merger documentation was publicly available and the deal value was $25 million or more. Based on this review, we have compiled the following deal data:1

Characteristics of Deals Reviewed 2012 2013 2014 2015 2016 2017 2018 2019

The number of deals we Sample Size 26 27 37 27 19 18 37 20 reviewed and the type of consideration paid in each Cash 73% 59% 59% 67% 53% 56% 84% 60%

Stock 8% 11% 6% 4% 0% 0% 3% 0%

Cash and Stock 19% 30% 35% 29% 47% 44% 13% 40%

Deals with Earnout 2012 2013 2014 2015 2016 2017 2018 2019

Deals that provided With Earnout 31% 33% 30% 26% 37% 22% 32% 40% contingent consideration based upon post-closing Without Earnout 69% 67% 70% 74% 63% 78% 68% 60% performance of the target (other than balance sheet adjustments)

Deals with Indemnification 2012 2013 2014 2015 2016 2017 2018 2019

Deals where the target’s With Indemnification shareholders or the buyer By Target’s Shareholders 100% 100% 97% 100% 100%2 94%3 84% 80% indemnified the other By Buyer 62% 44% 49% 69% 37% 61% 39% 45% post-closing for breaches of representations, warranties and covenants

Survival of Representations and Warranties 2012 2013 2014 2015 2016 2017 2018 2019

Length of time that Shortest 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. 9 Mos. 12 Mos. 12 Mos. representations and warranties survived the Longest 24 Mos. 30 Mos. 24 Mos. 24 Mos. 18 Mos. 24 Mos. 24 Mos. 24 Mos. closing for indemnification Most Frequent 18 Mos. 18 Mos. 12 & 18 18 Mos. 18 Mos. 12 Mos. 18 Mos. 18 Mos. purposes (subset: deals Mos. (tie) where representations and warranties survived the closing for indemnification purposes)4

Caps on Indemnification Obligations 2012 2013 2014 2015 2016 2017 2018 2019

Upper limits on With Cap 100% 100% 100% 100% 100% 100% 100% 100% indemnification obligations Limited to Escrow 81% 88% 89% 79% 83% 94%6 79% 86% where representations Limited to Purchase Price 0% 0% 0% 0% 0% 0% 0% 0% and warranties Exceptions to Limits5 96% 100% 100% 100% 95% 94% 100% 100% survived the closing for indemnification purposes Without Cap 0% 0% 0% 0% 0% 0% 0% 0%

1 For certain transactions, certain deal terms have been redacted from the publicly available documentation and are not reflected in the data compiled below.

2 Includes one transaction where the only representations that survive for purposes of indemnification are certain “fundamental” representations and representations concerning material contracts and intellectual property.

3 Includes one transaction where the only representations that survive for purposes of indemnification are those concerning capitalization, financial statements and undisclosed liabilities, but excludes one transaction where indemnification was provided for breaches of covenants prior to the closing but representations did not survive for purposes of indemnification.

4 Measured for representations and warranties generally; specified representations and warranties may survive longer.

5 Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly including capitalization, authority and validity. In a limited number of transactions, exceptions also included intellectual property representations.

6 Includes two transactions where the limit was below the escrow amount. Trends in VC-Backed Company M&A Deal Terms 19

Escrows 2012 2013 2014 2015 2016 2017 2018 2019

Deals having escrows With Escrow 100% 93%7 100% 93% 89% 100% 90%7 94% securing indemnification % of Deal Value obligations of the target’s Lowest8 5% 5% 2% 4% 5% 4% 3% 10% shareholders (subset: deals Highest 16% 20% 16% 16% 15% 13% 15% 13% with indemnification Most Frequent 10% 10% 10% 10% 10% 5% 10% 12% obligations of the Length of Time9 target shareholders) Shortest 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. 9 Mos. 12 Mos. 12 Mos. Longest 48 Mos. 30 Mos. 24 Mos. 36 Mos. 24 Mos. 24 Mos. 36 Mos. 36 Mos. Most Frequent 12 Mos. 18 Mos. 12 Mos. 12 & 18 18 Mos. 12 & 18 18 Mos. 12 Mos. Mos. (tie) Mos. (tie)

Exclusive Remedy 73% 60% 86% 63% 88% 71% 72% 64% Exceptions to Escrow Limit Where Escrow 100% 100% 100% 100% 93% 92% 100% 100%

Was Exclusive Remedy5

Baskets for Indemnification 2012 2013 2014 2015 2016 2017 2018 2019

Deals with indemnification Deductible10 27% 50% 44% 31% 47% 63% 47% 56% only for amounts 10 above a specified Threshold 65% 42% 56% 61% 53% 37% 53% 44% “deductible” or only after a specified “threshold” amount is reached

MAE Closing Condition 2012 2013 2014 2015 2016 2017 2018 2019

Deals with closing condition Condition in Favor of Buyer 95% 100% 97% 100% 100% 94% 100% 100% for the absence of a “material adverse effect” Condition in Favor of Target 9% 17% 19% 12% 39% 22% 12% 35% with respect to the other party, either explicitly or through representation brought down to closing

Exceptions to MAE 2012 2013 2014 2015 2016 2017 2018 2019

Deals where the definition With Exception11 84%12 96%13 100% 100% 100% 100% 97%13 100% of “material adverse effect” for the target contained specified exceptions

7 One transaction not including an escrow at closing did require funding of escrow with proceeds of earnout payments.

8 Excludes transactions which also specifically referred to representation and warranty insurance as recourse for the buyer.

9 Length of time does not include transactions where such time period cannot be ascertained from publicly available documentation.

10 A “hybrid” approach with both a deductible and a threshold was used in another 8% of these transactions in 2012, 8% of these transactions in 2013, and 8% of these transactions in 2015.

11 Generally, exceptions were for general economic and industry conditions.

12 Includes one transaction where the specified exceptions apply for purposes of a standalone “material adverse effect” closing condition and certain representations, but do not apply for purposes of other representations.

13 The only transaction not including such exceptions provided for a closing on the same day the definitive agreement was signed. We Wrote the Book on Going Public. You can write the next chapter.

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www.wilmerhale.com/2020MAreport

Data Sources: M&A data is sourced from S&P Global Market Intelligence. WilmerHale compiled the data for sales of VC-backed companies from Dow Jones VentureSource. For law firm rankings, sales of VC-backed companies are included under the current name of each law firm. Other data sources are as indicated in this report. © 2020 Wilmer Cutler Pickering Hale and Dorr llp Wilmer CutlerPickering HaleandDorr Connect withus any undertaking tokeeprecipientsadvised ofalllegaldevelopments In Beijing,weareregistered tooperateasaForeignLawFirmRepresentative Office.Thismaterialisforgeneralinformational purposesonlyanddoesnot representouradviceastoanyparticularsetof facts;nordoesitrepresent Regulation Authority(SRA No.287488).Ourprofessionalrulescanbefound atwww.sra.org.uk/solicitors/code-of-conduct.page. Alistofpartnersandtheirprofessionalqualifications isavailableforinspectionatourUKoffice. Washington, DC20006,+1 2026636000.OurUnitedKingdomofficeisoperated underaseparateDelawarelimitedliability partnershipofsolicitorsandregisteredforeign lawyersauthorizedandregulatedbytheSolicitors llp isaDelawarelimitedliability partnership.WilmerHaleprincipallawoffices: 60StateStreet,Boston,Massachusetts 02109,+16175266000;1875Pennsylvania Avenue, NW, . Prior results do notguaranteeasimilar outcome.Photographs withinmaynotbeoffirm personnelorclients. © 2020WilmerCutlerPickering HaleandDorr wilmerhale.com llp

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