Best Practices in Drafting and Negotiating Contracts and Agreements

11th Annual Mergers and Acquisitions Insight Conference

December 5-6, 2013 Calgary, Alberta

John F. Clifford

Overview

Avoiding uncertainty in deal terms Trends in M&A deal terms

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Avoiding Uncertainty

Six sources of uncertainty in deal terms (K. Adams) Ambiguity Undue generality Inconsistency Redundancy Conflict Vagueness

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Avoiding Uncertainty – cont’d.

“Gaps” also are a common source of ambiguity Missing details Change in circumstances Agreements to agree

It’s all about the words Important to review carefully More eyes are better

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Trends in M&A Deal Terms

ABA 2012 Canadian Private Target M&A Deal Points Study Sourced agreements from SEDAR

Deals closed in 2010 and 2011

350+ deals identified Removed agreements for deals involving public

targets, deals with purchase price <$5 million and “non-traditional” deals Bankruptcy, non-arm's length, governing law not Canadian

Resulting pool: 64 deals having value ranging from $5 million to $2.25

billion

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Trends in M&A Deal Terms – cont’d.

Study Methodology Agreements reviewed in detail

9 principal areas of review Divided amongst six working groups Completed worksheet for each issue, each agreement

o modeled on US forms

QC check of worksheets “Issue group leaders”

Collated data Further QC

Checked data used to complete study

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Trends in M&A Deal Terms – cont’d.

Study Results 100+ substantive slides Study reports on

Statistic (frequency of use of certain terms) Comparisons to ABA model agreement provisions Comparisons to 2008 and 2010 Canadian Studies Comparisons to US Private Target Studies

Available at: https://apps.americanbar.org/dch/committee.cfm?com=CL560003

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Select Study Slides

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Contents I. Financial Provisions ………………………………………………………………………………………………… Slide 11

A. Post-Closing Purchase Price Adjustments…………………………………………………………………………………… Slide 12 B. Earnouts………………………………………………………………………………………………………………………….. Slide 19 C. North American Comparisons…………………………………………………………………………………………………. Slide 22

II. Pervasive Qualifiers………………………………………………………………………………………………….. Slide 23

A. Definition of “Material Adverse Effect” ……………………………………………………………………………………….. Slide 24 B. Knowledge……………………………………………………………………………………………………………………….. Slide 38 C. North American Comparisons………………………………………………………………………………………………….. Slide 41

III. Target’s Representations, Warranties and Covenants…………………………………………………………Slide 42

A. Financial Statements…………………………………………………………………………………………………………… Slide 43 B. “No Undisclosed Liabilities” ……………………………………………………………………………………………………. Slide 45 C. Compliance with Law…………………………………………………………………………………………………………… Slide 47 D. Full Disclosure …………………………………………………………………………………………………………………. Slide 50 E. North American Comparisons…………………………………………………………………………………………………. Slide 52 F. Covenants……………………………………………………………………………………………………………………….. Slide 53 G. North American Comparisons…………………………………………………………………………………………………. Slide 57

IV. Conditions to Closing………………………………………………………………………………………………… Slide 58

A. Accuracy of Target’s Representations……………………………………………………………………………………….. Slide 59 B. Buyer’s MAC Condition………………………………………………………………………………………………………… Slide 65 C. No Legal Proceedings Challenging the Transaction ……………………………………………………………………….. Slide 67 D. Legal Opinions (Non-Tax) of Target’s Counsel……………………………………………………………………………… Slide 70 E. North American Comparisons………………………………………………………………………………………………… Slide 71

V. Indemnification………………………………………………………………………………………………………… Slide 72

A. Sandbagging…………………………………………………………………………………………………………………….. Slide 73 B. “No Other Representations and Warranties”/Non-Reliance………………………………………………………………… Slide 77 C. Non-Reliance and “Sandbagging” – Correlation……………………………………………………………………………… Slide 80 D. Non-Reliance and Full Disclosure Representation – Correlation…………………………………………………………..Slide 81 E. “Sandbagging” and Full Disclosure Representation – Correlation…………………………………………………………Slide 82 F. North American Comparisons…………………………………………………………………………………………………. Slide 83 G. Survival/Time to Assert Claims………………………………………………………………………………………………… Slide 84 H. Types of Damages/Losses Covered………………………………………………………………………………………….. Slide 87 I. Baskets…………………………………………………………………………………………………………………………… Slide 89 J. Eligible Claim Threshold……………………………………………………………………………………………………….. Slide 95 K. “Double Materiality” Scrape……………………………………………………………………………………………………. Slide 97 L. Caps……………………………………………………………………………………………………………………………… Slide 99 M. Indemnification as Exclusive Remedy………………………………………………………………………………………. Slide 103 N. Escrow/Holdback………………………………………………………………………………………………………………. Slide 105 O. Reductions Against Buyer’s Indemnification Claims………………………………………………………………………. Slide 108 P. North American Comparisons………………………………………………………………………………………………... Slide 109

VI. Dispute Resolution…………………………………………………………………………………………………. Slide 116

A. Governing Law…………………………………………………………………………………………………………………. Slide 117 B. Alternative Dispute Resolution……………………………………………………………………………………………….. Slide 118 C. North American Comparisons………………………………………………………………………………………………... Slide 120

Canadian 2012 Private Target Study, slide 10 Release Date: 12/28/12

Post-Closing Purchase Price Adjustments* Includes

Adjustment70%

(63% in 2008 study)(50% in 2010 study)

No Adjustment

30%(37% in 2008 study)(50% in 2010 study)

Financial Provisions

Adjustment Metrics**

(Subset: includes adjustment)

** 22.5% of the post-closing purchase price adjustments were based on more than one metric. Canadian 2012 Private Target Study, slide 13

Release Date: 12/28/12

39%27%

6%11%

3%16%

6%11%

77%70%

3%5%

Other

Cash

Assets

Debt

Working Capital

Earnings

* Excludes one deal where information was redacted.

Deals in 2012

Deals in 2010

US 2011 Deal Points Study Canadian 2012 Deal Points Study

Deals with Post-Closing Adjustments

82% (68% in 2007 US study*) (79% in 2009 US study*)

70% (63% in 2008 study) (50% in 2010 study)

Working Capital as Adjustment Metric

79% (69% in 2007 US study) (77% in 2009 US study)

70% (55% in 2008 study) (77% in 2010 study)

Buyer Prepares First Draft of Closing Balance Sheet

86% (79% in 2007 US study) (83% in 2009 US study)

52% (36% in 2008 study) (29% in 2010 study)

Methodology – GAAP consistent with past practice

42% (72% in 2007 US study) (39% in 2009 US study)

41% (48% in 2008 study) (19% in 2010 study)

Deals with Earnouts 38% (19% in 2007 US study) (29% in 2009 US study)

21% (10% in 2008 study) (3% in 2010 study)

Private Target M&A Deals North American Comparisons

Financial Provisions

* The “2007 US study” refers to the 2007 Private Target Mergers & Acquisitions Deal Points Study released by the ABA Mergers & Acquisitions Committee on October 8, 2008. The “2009 US study” refers to the 2009 Private Target Mergers & Acquisitions Deal Points Study released by the ABA Mergers & Acquisitions Committee on December 13, 2009.

Canadian 2012 Private Target Study, slide 22 Release Date: 12/28/12

Definition of “Material Adverse Effect”

“Material Adverse Effect” means any result, occurrence, fact, change, event or effect that has a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target.

(ABA Model Stock Purchase Agreement, Second Edition)

Pervasive Qualifiers

Canadian 2012 Private Target Study, slide 24 Release Date: 12/28/12

Pervasive Qualifiers

Definition of “Material Adverse Effect”

Canadian 2012 Private Target Study, slide 25 Release Date: 12/28/12

MAE Defined*83%

(73% in 2010 study)

MAE Not Defined

14%(18% in 2010 study)

MAE Not Included

3%(9% in 2010 study)

"Prospects" Not Included

65%(60% in 2010 study)

"Prospects" Included

35%(40% in 2010 study)

(Subset: MAE defined*)

*Excludes two deals where information was redacted.

Definition of “Material Adverse Effect” – Carve Outs

(Subset: deals with MAE definition)

Pervasive Qualifiers

Canadian 2012 Private Target Study, slide 32 Release Date: 12/28/12

No Carve Outs Included

30%(40% in 2010 study)

Definition Includes Carve

Outs70%

(60% in 2010 study)

Definition of “Material Adverse Effect” – Carve Outs*

Pervasive Qualifiers

Canadian 2012 Private Target Study, slide 33 Release Date: 12/28/12

33%48%

30%

57%33%

50%44%

67%

48%76%

70%60%

93%71%

93%86%

General Economic Conditions

Industry Conditions

Financial Market Downturn

Announcment or Pendency ofDeal

Changes in Law

Actions Required by Agreement

War or Terrorism

Changes in Accounting

(Subset: deals with MAE definition with carve-outs)

*Definitions may include more than one carve out.

Deals in 2012

Deals in 2010

Full Disclosure Representation

Representation Included

52%(56% in 2010 study)

Representation Not Included

48%(44% in 2010 study)

Yes - 39%(37% in 2010 study)

No - 61%(63% in 2010 study)

Qualified by Knowledge

(Subset: deals with rep)

Target’s Representations, Warranties and Covenants

Canadian 2012 Private Target Study, slide 51 Release Date: 12/28/12

Cap Amounts as % of Transaction Value* (Subset: deals with expressly stated cap)

Indemnification

* Excludes 18 deals where cap amount is all or partially redacted or final purchase price is not determinable.

Canadian 2012 Private Target Study, slide 100 Release Date: 12/28/12

52%45%40%

17%17%

14%

7%7%18%

7%14%

18%

3%3%

7%

14%14%

3%

Purchase Price

> 50% to < Purchase Price

> 25% to 50%

> 15% to 25%

> 10% to 15%

< 10%

Deals in 2012

Deals in 2010

Deals in 2008

Reductions Against Buyer’s Indemnification Claims

Silent61%

(66% in 2008 study(66% in 2010 study)

Expressly Included

39%(34% in 2008 study)(34% in 2010 study)

Silent46%

(60% in 2008 study)(50% in 2010 study)

Expressly Included

54%(40% in 2008 study)(50% in 2010 study)

Expressly Included

37%(20% in 2008 study)(22% in 2010 study)

Silent63%

(80% in 2008 study(78% in 2010 study)

(Subset: deals with survival provisions) Reductions for Tax Benefits Reductions for Insurance Benefits

Requirement that Buyer Mitigate Losses

Indemnification

Canadian 2012 Private Target Study, slide 108 Release Date: 12/28/12

Canadian 2012 Deal Points Study

4%

12%

2%

34%

14%

25%

0%

3%

1%

3%Silent/Unspecified

Express No Survival

6 months or less

> 6 to < 12 months

12 months

> 12 to < 18 months

18 months

> 18 to < 24 months

24 months

> 24 months

Private Target M&A Deals North American Comparisons

Survival Periods

Indemnification

US 2011 Deal Points Study

8.5%

47%

1.7%

12%

3.4%

17%

0%

1.7%

1.7%

7%Silent/Unspecified

Express No Survival

6 months or less

> 6 to < 12 months

12 months

> 12 to < 18 months

18 months

> 18 to < 24 months

24 months

> 24 months

Canadian 2012 Private Target Study, slide 109 Release Date: 12/28/12

US 2011 Deal Points Study

Canadian 2012 Deal Points Study

9%

0%

4%

14%

17%

14%

43%

Purchase Price

> 50% to < PurchasePrice

> 25% to 50%

> 15% to 25%

> 10% to 15%

10%

< 10%

40%

14%

18%

18%

7%

3%<10%

10% to 15%

>15% to 25%

>25% to 50%

>50% to <PurchasePrice

Purchase Price

Cap Amounts as % of Transaction Value

Private Target M&A Deals North American Comparisons

Indemnification

Canadian 2012 Private Target Study, slide 114 Release Date: 12/28/12

Questions:

John F. Clifford (416) 865-7134

john.clifford@mcmillan.ca