structuring carve-out transactions: key deal,...

Structuring Carve-Out Transactions: Key Deal,

Environmental, Intellectual Property, and

Other ConsiderationsAllocating Assets and Liabilities, Due Diligence, Reps, and Warranties, Consents

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THURSDAY, JUNE 6, 2019

Presenting a live 90-minute webinar with interactive Q&A

Abbi L. Cohen, Partner, Dechert, Philadelphia

J. Ian Downes, Counsel, Dechert, Philadelphia

Stephen R. Pratt, Partner, Dechert, Philadelphia

Nathan Smith, Associate, Dechert, London

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© 2019 Dechert LLP

Carve-Out Transactions

Practical Tips for Successfully Navigating the Key Pitfalls

June 6, 2019

Abbi Cohen | Ian Downes | Stephen Pratt | Nathan Smith

|

Agenda

▪ Section 1 – Introduction

▪ Section 2 – Preparing for Sale

▪ Section 3 – Scope of Due Diligence

▪ Section 4 – Allocation of Assets & Liabilities

▪ Section 5 – Transition

▪ Section 6 – Key Transaction Documents

Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 6June 6, 2019

|

Section 1 – Introduction

Overview – What is a Carve-Out?

▪ A sale of a business or division

▪ Why carve-out a business or division?

▪ Preparation is key

• Unique, complex issues that need to be addressed


Practice Point: Carve-outs are typically closed within six to

12 months of initiation of the sale process.

|

Section 1 – Introduction (continued) Market Data

▪ Carve-Outs by Year and by Deal Value:


Source: Deloitte M&A Index 2017: CREATING SHAREHOLDER VALUE THROUGH DIVESTMENTS

|

Section 1 – Introduction (continued)

▪ Ability to Meet Expected Timeline & Budget for Carve-Outs:


Source: Accenture’s 2015 STRATEGY CARVE-OUT SURVEY Practice Point: Setting realistic expectations is

key—carve-outs frequently run over budget and

past internal deadlines.

|

Section 2 – Preparing for Sale

▪ Carve-out Transactions by Industry:


Source: ABA Mergers and Acquisitions Committee's M&A CARVEOUT

TRANSACTIONS DEAL POINTS STUDY (surveying 126 transactions from 2015-2016)

|

Section 2 – Preparing for Sale (continued)

Determining a Transaction Perimeter

▪ A seller should clearly delineate what parts of its business are “in scope” and

being sold versus “out of scope” and being retained

▪ Where is the target business operated?

• Where are assets, sales, and employees located?

• How is non-U.S. business held?

• Create jurisdiction summary charts

▪ Are there sites where sold and retained businesses will be co-located?


Practice Point: Consider the touch points between the target business,

on the one hand, and the retained business, on the other hand.

|

Section 2 – Preparing for Sale (continued)Building a Carve-Out Team

▪ Creating a strong internal and external team is key

• Responsible for sell-side diligence

• Develop a carve-out plan

• Failing to prepare is preparing to fail

▪ Sellers should carefully determine which employees to bring “under the tent” to

assist with the transaction

• Devising a communication strategy or policy with respect to employees who are

outside of the tent is recommended

• Employee loyalty may shift as deal progresses


Practice Point: Engage appropriate professional services firms

early on to assist with planning, negotiation, and execution.

|

Section 2 – Preparing for Sale (continued)Deal structure

▪ An in-depth tax analysis should be conducted to determine viability and

preferred transaction structure

• Develop a steps plan

▪ Key considerations include:

• Number of entities sold and location of entities’ assets

• Tax classification of seller

• Available tax attributes of seller

• Historical tax liabilities


|

Section 2 – Preparing for Sale (continued)Preparation of stand-alone financials

▪ Preparing separate financial statements to the satisfaction of the buyer and its

lenders is a common long lead time item

• International Financial Reporting Standards may be required for prospective non-

U.S. buyers

▪ Consider the expected buyer and financing structure

• Public M&A


Question: What do you do if audited financials are not available?

Answer: Consider your potential buyer(s), and determine the

minimum amount of financial disclosure that they would need in order

to consummate the transaction. Unaudited financials/management

reports may be enough in certain situations.

|

Section 3 – Scope of Due Diligence

▪ Contracts & Licenses

• Change of control, assignment, and other consent rights

• Acceleration of payments or vesting

• Shared contracts

• Related party agreements

▪ Assets

• Real estate & other tangible property

• Intellectual property & intangibles

• Permits, licenses and registrations

▪ Collateral to be replaced

• Letters of credit

• Guarantees

• Bonding arrangements

▪ Buyer should engage diligence team early on


Practice Point:

Establishing a clearly

defined materiality

threshold can streamline

the due diligence

process.

|

Section 4 – Allocation of Assets & Liabilities

Allocation of Assets

▪ Stock sale vs. asset sale vs. combination

▪ Important to clearly define what constitutes the business being acquired

• Sufficiency of assets representation in the purchase agreement

▪ Are assets limited to those “exclusively” used by the acquired business or is a

different standard more appropriate?

• Key diligence focus for the buyer

▪ What happens when acquired assets don’t transfer?

• Wrong pockets provisions

• “Back-to-back” arrangements


|

Section 4 – Allocation of Assets & Liabilities (continued)

Allocation of Liabilities

▪ Stock sale vs. asset sale vs. combination

• Use of indemnification to change structure

• Consider whether to allocate liabilities relating to businesses or assets no longer

owned or operated by the Business

▪ “Your watch” vs. “our watch”

• Depends on leverage

• Buyers want a clearly defined set of liabilities


|

Section 4 – Allocation of Assets & Liabilities (continued)

Allocation of Liabilities

▪ Liabilities that may transfer as a matter of law:

• Environmental (owner/operator liability)

• Products liability

• Employee matters

▪ How to protect against liabilities in the purchase agreement:

• Diligence

• Indemnity

• “Excluded” liabilities

• Cooperation & privilege


|

Section 5 – Transition


Shared Business Functions & Services

▪ Certain critical services may be

intertwined between the target

business and the retained business:

• IT

• Accounting

• Payroll & HR

• Benefit plans

• Insurance

• Counsel and litigation support

• Local

▪ Shared contracts

• Splitting contracts / timing

• Address consent fees

▪ Integration is key

▪ Focus on the details and cost

analysis of any transition services

Practice Point: Failing to ensure

business continuity for shared services

on day one post-close is the #1 item of

value leakage for a buyer.

|

Section 5 – Transition (continued)Employees & Benefits

▪ Understanding the employees involved, along with their prior and future job

functions, is crucial to a successful carve-out

• Seller should initially plan who they intend to transfer vs. who they intend to retain

• Buyer can condition transaction on the retention of key employees identified prior to

signing

• Mapping employees to new organization – Pre- or post-closing layoffs?

▪ Seller may incentivize loyalty through retention and/or performance bonuses


Practice Point: It is important to minimize disruption of employees’ day-to-day

operations during the negotiation and consummation of the transaction.

|

Section 5 – Transition (continued)Employees & Benefits

▪ Transfer of Employees

• Structure of deal plays a key role

• Automatically transfer vs formal offer and acceptance

• Allocation of severance costs and other liabilities of non-transferred employees

• Required notifications and/or consents may affect timing

Unions

WARN Act

▪ Post-Closing Integration

• Strategic buyers should plan for how to fold acquired employees into their existing

compensation structure and benefit plans

• Purchase agreement may provide for a continuation of a certain level of benefits for

transferred employees

• Benefit plan transfer/integration

• Employment agreements/restrictive covenants


|

Section 5 – Transition (continued)Transfer of Union Employees

▪ Union-related obligations depend on the form of transaction

• Stock sale – CBAs and bargaining obligations are unaffected

• Asset sale

CBAs do not automatically transfer, but agreements may require seller to condition sale on assumption

Successorship principles typically require recognition of unions and bargaining

▪ Effects bargaining

• Seller must bargain concerning the “effects” of the sale

• Typical subjects include severance, transfers within seller’s organization, pension and retiree

benefits

• Notice and opportunity required in advance of closing

• Duty is to bargain in good faith, not to agree to any specific terms

▪ Multiemployer pension plans

• An asset sale can trigger a seller’s withdrawal from union multiemployer pension plans

• Liability even if employees are hired by buyer

• ERISA § 4204 allows for avoidance of withdrawal liability if certain conditions are met


|

Environmental

▪ Due Diligence

• Sell-side Phase I’s and Limited Environmental Compliance Reviews can streamline

due diligence process and minimize disruption of multiple bidder site visits

• For regulated industry sectors, high level review of permit transfer/reissuance

process and timing should be part of preliminary due diligence

Sellers should expect that sell-side employees will need to prepare technical permit

transfer/reissuance applications

• Environmental transfer acts, like NJ ISRA or CT Transfer Act, can be gating issues

• Buyers should consider whether financial assurance obligations will be triggered or

need to be maintained post-closing


|

Environmental (continued)

▪ Managing Post-Closing Environmental Liabilities

• Consider whether existing environmental insurance, third party indemnity or

guarantees will be available to buyer post-closing

Unusual for seller’s environmental insurance to be assignable to buyer

• Splitting shared facilities post-closing can be challenging environmentally

Consider cost, timing and who controls

▪ Post-Closing Integration

• Will key EHS personnel remain with seller?

If so, consider how to replace the functions, maintain institutional knowledge

• Will the acquired business change the buyer’s environmental/regulatory profile?


|

Section 5 – Transition (continued)Intellectual Property & Information Technology

▪ Legal ownership of IP used by the acquired business may be difficult to

disentangle:

• Software used by the acquired business’ employees often licensed at the seller-

entity level and will need to be renegotiated separately

• Buyer may want to enter into licensing or joint ownership arrangements with the

seller to permit the acquired business to continue using seller IP

▪ Carved-out business might have limited or no backoffice IT, so planning for

replacement is a key workstream


|

Intellectual Property

▪ Common Due Diligence Matters and Initial Considerations

• IP Ownership

• Scoping IT Assets

Data Considerations

• Software and Other IP Licenses

Shared?

Split?

• Consent Issues

Review Structure

2-Step Transaction

• Internal Reorganization? Contribution?

• Sale to Third Party


|

Intellectual Property (continued)

▪ Common Due Diligence Matters and Initial Considerations (cont’d)

• Review of IP Portfolio

Territorial Review

Patent Family

Double Patenting and Terminal Disclaimer Issues

• Branding Issues

Short-term

• Sell-off existing Inventory

• Marketing Materials

Long-term

• Co-existence

• Re-branding

• License


|

Intellectual Property (continued)

▪ Key IP-Related Documents

• IP Assignments

• Cross-License Agreement

• Transition Services Agreements

▪ Negotiation and Drafting Tips

• Balancing interests of Seller and Buyer

• Role of Diligence and Understanding the Business

• Importance of Schedules

• Licenses - Focus on Scope and Field of Use


|

Section 6 – Key Transaction Documents

▪ Purchase agreement

▪ Transition services agreement

▪ Escrow agreement

▪ Assignment agreements

▪ Arrangements for licensing or joint ownership of IP

▪ Subleases of leased real property

▪ Consents

• Regulatory

• Contractual

• Stockholder approval (public M&A)


|

Conclusion & Questions


|

Core Team Member

31June 6, 2019

Partner, Philadelphia

Abbi L. Cohen

[email protected]

+ 1 215 994 2352

Abbi L. Cohen, recognized as a leading environmental lawyer by Chambers USA

for more than a decade, focuses her practice on evaluating environmental liabilities

associated with corporate, real estate, and financing transactions—including with respect

to energy—and providing both state and federal permitting and regulatory compliance

advice. She has assisted clients in siting and permitting industrial facilities, including

resource recovery and cogeneration facilities, as well as power plants.

Ms. Cohen has provided environmental advice with respect to more than a thousand

business transactions. She has assisted one of the leading U.S. rating agencies in

developing environmental assessment and insurance criteria and in evaluating the

potential impact of environmental conditions on mortgage-backed securities in numerous

transactions involving portfolios consisting of multiple properties. She has also advised

clients on structuring transactions to minimize environmental liabilities, negotiating

strategies, and in preparing relevant provisions in transaction documents in connection

with acquisitions, divestitures, and financings. She has participated in supervising

environmental consultants throughout North America, South America, Europe, and Asia.

Awards/Recognition

Ms. Cohen has been consistently recognized by

Chambers USA, the International Who’s Who of

Environmental Lawyers and Best Lawyers in

America as a leading environmental lawyer. In

recent editions of Chambers, Ms. Cohen was

identified as a “real subject matter expert” that is

“very client-oriented and very commercial” with one

client praising how “she combines intellect, legal

knowledge and a deal-oriented demeanor.”

Bar Admissions/Qualification

Pennsylvania

Education

Barnard College, Columbia University, B.A., 1980,

magna cum laude, with High Honors in economics,

Phi Beta Kappa

University of Pennsylvania Law School, J.D., 1983

Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls

Speaker

|

Core Team Member

32June 6, 2019

Counsel, Philadelphia

J. Ian Downes

[email protected]

+1 215 994 2346

J. Ian Downes practices in the area of labor and employment law, with a focus on ERISA

litigation and labor-management relations. He has significant experience with ERISA

class actions, including so-called “stock drop” cases, as well as in representing clients in

all types of labor and employment litigation.

Mr. Downes devotes a significant portion of his practice to providing clients with day-to-

day assistance and counseling concerning all varieties of labor and employment issues,

including negotiation and drafting of employment agreements and restrictive covenants,

planning and implementing reductions in force and complying with the Worker Adjustment

and Retraining Notification (WARN) Act and state and local plant closing laws, and

handling of employee complaints and discipline issues. Dechert’s Corporate and

Securities teams frequently call upon Mr. Downes to assist with labor issues arising in

connection with corporate transactions, particularly those involving unionized workforces.

United States District Court for the District of New

Jersey, Honorable Joseph E. Irenas

Bar Admissions/Qualifications

Education

Harvard Law School, J.D., 2001

Amherst College, B.A., 1997

Memberships


Clerkships

Pennsylvania

New Jersey

United States Court of Appeals for the Third Circuit

United States District Court for the District of New

Jersey

United States District Court for the Eastern District

of Pennsylvania

American Bar Association, Section of Labor and

Employment Law

Philadelphia Bar Association

Speaker

|

Core Team Member

33June 6, 2019

Partner, Philadelphia

Stephen R. Pratt

[email protected]

+1 215 994 2296

Stephen R. Pratt focuses his practice on mergers and acquisitions, with an emphasis on

private equity and public company M&A, as well as securities offerings and general

corporate matters, including corporate governance matters and public company reporting

and disclosure issues.

Mr. Pratt has advised strategic buyers and sellers, private equity sponsors, special

committees and financial advisors on merger and acquisition transactions, with

representations in a wide range of industries including banking, financial services,

manufacturing, biotechnology, real estate, telecommunications, aviation, gaming and

medical devices.

He also regularly advises alternative asset managers on fund formation and regulatory

and operational issues involving business development companies and other permanent

capital vehicles, including issues concerning joint ventures and other strategic

transactions.


Pennsylvania New York

Education

Boston College, B.S., 2005

University of Pennsylvania Law School, J.D., 2010,

cum laude, Articles Editor for the University of

Pennsylvania Journal of Business Law


Core Team Member

Memberships

Philadelphia Bar Association

Awards/Recognition

In 2018, Mr. Pratt was selected as an “Acritas

Stars” nominee.

Speaker

|

Core Team Member

34June 6, 2019

Associate, London

Nathan Smith

[email protected]

+44 20 7184 7813

Nathan Smith focuses his practice on all matters relating to intellectual property,

particularly intellectual property litigation. Mr. Smith’s practice ranges from brand

protection and enforcement to advising on the international expansion and development

of intellectual property portfolios with particular emphasis on the fashion, retail, telecoms,

leisure and beauty sectors. Mr. Smith also regularly advises on copyright and design

infringement with a focus on the fashion industry.

Mr. Smith regularly contributes articles to intellectual property related publications and

has recently spoken at seminars on the Protection of Trade Mark Rights within the

Financial Services Industry and the Protection and Enforcement of Design Rights in the

Fashion Industry.

Awards/Recognition

In the 2017 edition of The Legal 500 UK, Mr. Smith

is noted for his work in intellectual property, with his

practice recognised as going "from strength to

strength."


England and Wales

Education

International Trade Mark Association

Memberships


University of Bristol, Post-graduate Diploma,

Intellectual Property Law

University of Sheffield, Law

Speaker

For further information, visit our website at dechert.com.Dechert practices as a limited liability partnership or limited liability company other than in Dublin and Hong Kong.