Most of us remember the Eagles as one of the best-selling music groups of all time. But in addition to great musicians, the band also unintentionally gave us some great wisdom that dealmakers can put to work in managing successful merger and acquisition (M&A) transactions. We lost Eagles founder Glenn Frey earlier this year, but fortunately the band’s music lives on. I have assembled some classic Eagles lyrics and will share what M&A participants can learn from them.
“Tell me your secrets, I'll tell you mine; this ain’t no time to be cool. And tell all your girlfriends, your ‘been around the world’ friends, that talk is for losers and fools.”
As this line from “Victim of Love” reminds us, any successful relationship, including an M&A transaction, is going to involve the exchange of confidential information. Every seller, and many buyers, are going to have to get comfortable with the idea of sharing their confidential information with the other party in order to move forward with the transaction. That’s why M&A transactions often begin with the negotiation and execution of a confidentiality agreement.
“You never thought you'd be alone, this far down the line. And I know what's been on your mind, you're afraid it's all been wasted time.”
“Wasted Time” is about a subject every M&A participant fears – wasting time with a party who will ultimately be unwilling or unable to consummate a transaction. One way to avoid wasting time with a counterparty who may let you down is to conduct due diligence on the party early in the process. Does the other party have a history of closing transactions? Is the party represented by experienced and professional bankers, accountants and lawyers? Does the potential buyer have a strong enough balance sheet or financial partners to actually close the deal? Is the potential buyer just “kicking the tires,” perhaps gathering information about a competitor or seeking to tie up the seller now while seeking to secure financial backing later? Is the seller serious about selling or just seeking valuation information or a “stalking horse” bid to drive up the price he will receive when he sells to a third party? Anti-trust issues and other regulatory hurdles could also lead to wasted time in negotiations between buyers and sellers.
“It wasn’t for the money, at least it didn't start that way. It wasn't for the runnin’, but now he’s runnin’ every day.”
“Certain Kind of Fool” reminds us that the money, or the total purchase price payable in an M&A transaction, is only one of the issues that a seller should consider when evaluating purchase offers. Is the purchase payable in full at the closing or over time? Is the purchase price payable in cash, stock of the buyer, or some other property or currency? Does the offer involve escrows, hold-backs or other contingencies? Does the buyer have adequate financing or are there other factors that may affect the buyer’s ability to close or to close quickly? Will the seller be expected to continue providing services to the target company after the closing? Of course, every offer starts with the money, but it never ends there.
“Who will provide the grand design? What is yours and what is mine? ‘Cause there is no more new frontier. We have got to make it here.”
These lines from “The Last Resort” remind us that any well-prepared purchase agreement should include detailed disclosure schedules setting forth “what is yours and what is mine” as between the buyer and seller. That avoids costly arguments after the closing and sets both parties up for a successful transition. Is that pickup truck that the seller drives to work and occasionally uses to transport company goods among the assets being sold? How about that portrait of dogs playing poker behind the president’s desk? And if the seller owns real estate, is the property included? How about the minerals under the property?
“Nothing's wrong as far as I can see. We make it harder than it has to be. And I can't tell you why.”
“I Can’t Tell You Why” is a song about a troubled relationship, but this line reminds us of one way in which buyers and sellers can avoid trouble in their M&A transactions. Use of knowledge qualifiers allows parties making representations and warranties to say, in effect, “nothing’s wrong as far as I can see” but leave open the possibility that something is actually wrong. For example, a seller might represent and warrant that “to the best of seller’s knowledge, no customer has any valid warranty claims against the target company.” In that example, if an actual warranty claim were to be brought after the closing, it would not represent a breach of the seller’s representation and warranty unless the seller actually knew about the claim prior to signing the purchase agreement.
“You bitch about the present and blame it on the past, I’d like to find your inner child and kick its little ass! Get over it!”
One of the funniest lines in the Eagles catalogue comes from “Get Over It.” This song stresses the importance of letting little issues slide, which is exactly the purpose of a materiality qualifier in an M&A purchase agreement. Buyers and sellers alike should understand when and where it is appropriate to include materiality qualifiers. For example, a buyer might only care about the condition of office equipment if it is material to the target company’s business operations, but the buyer might want to know the terms of every agreement between the target company and the seller or any of its affiliates, regardless of the dollar amount involved.
“‘Relax,’ said the night man, ‘We are programmed to receive. You can check out any time you like, but you can never leave!’”
This ominous conclusion to “Hotel California” should remind us that just because a deal closes doesn’t mean that your obligations under the purchase agreement and the other transaction documents will have ceased. Buyers and sellers should carefully review and understand the survival provisions of the transaction documents to understand how long their obligations will continue. For example, it is not unusual for certain representations and warranties of the seller or buyer to survive the closing for a period of time, perhaps 12 months. On the other hand, other obligations such as noncompetition covenants might extend even further into the future, perhaps two years or more. Finally, some obligations, such as confidentiality covenants, claims for fraud or obligations for taxes incurred prior to closing, may last indefinitely, like a stay at the Hotel California.
“And I'm already gone, and I'm feelin’ strong, I will sing this victory song: ‘Woo hoo hoo, my my, woo hoo hoo!’”
“Already Gone” is a song about freedom from a past relationship. In the M&A world, a seller’s freedom from potential claims by the buyer typically comes upon the expiration of the time period set forth in the indemnity section of the purchase agreement. If a buyer does not timely bring a claim against the seller during the indemnity period, the buyer may be without a remedy and the seller may be “already gone.” Singing a victory song is optional.
Doug Clayton is a partner in the Corporate and Securities Practice Group of Cantey Hanger LLP. He is a graduate of Harvard Law School and Texas Tech University. Clayton focuses his practice on mergers and acquisitions, corporate finance, securities offerings and other business transactions. For more information call 817-877-2890 or visit www.canteyhanger.com or Clayton’s blog at www.NorthTexasSECLawyer.com.
This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.