Shareholder Representative Services (SRS) recently issued the results of its M&A Deal Terms Study covering 196 private-target acquisition agreements. The deals closed between July 2010 and September 2011. The 2011 study compares results against an earlier study that encompassed deals from July 2007 to July 2010. Some of the interesting findings are:
- use of escrows for post-closing purchase price adjustments has doubled since 2010
- average escrow periods increased from 15.9 months to 18.3 months
- The definition of “material adverse effect” (MAE) had carve-outs in 92% of the deals. Common carve outs included changes in law (71%), changes in economic conditions (87%), changes in accounting standards (73%) and changes effecting the particular industry (79%)
- For knowledge qualifiers, 11% of deals required actual knowledge. For those deals using constructive knowledge, 82% required reasonable or due inquiry, 35% required such reasonable or due inquiry of certain employees. 87% of the deals.
- For the compliance with law representation, 80% of deals included present and past compliance. For the Notice of Investigation rep, 8% included this rep without a qualifier and 20% included a knowledge qualifier. For notice of violation rep, 70% included this rep while 12% contained a knowledge qualifier. For 7% of deals, the complete rep was subject to a knowledge qualifier.
- 90% of all deals in the study required seller to update reps and warranties.
- At the signing of an agreement, 10% of deals required the reps to be accurate “in all respects”, 72% require reps to be accurate “in all materials respects” and 18% are subject to MAE. However, for closing reps, 66% of deals use the “in all material respects” while 33% use MAE.
- Only 1% of deals had stand-alone environmental indemnities. In order words, environmental indemnity was linked to a breach of rep or warranty, or covenant.
- For survival periods for making claims, 46% of deals had 18-month survival period, with 27% having 12 month period and 14% using two year period
- 14% of deals provided for a separate survival period for environmental liabilities
- For indemnification baskets, 64% applied to first dollars while 33% of deals had a deductible. The average size of the bucket has been dropping with 57% of deals having buckets that represented 0.5% of the transaction value or less while a transaction percentage of 0.5% to 1% was used in 34% of deals.
- 9% of the deals with baskets had carveouts for breaches of environmental reps
- 6% of the deals with caps had carveouts for breaches of environmental reps
- Indemnification was the exclusive remedy for breaches in 93% of the deals. However, 95% of those deals had carveouts for fraud and 54% for intentional misrepresentation.
- 81% of deals provided that buyer indemnifications claims would be reduce by insurance proceeds
The complete report is available from www. shareholderrep.com