General Procedure for M&ATransactions in Germany Summer 2011

The life of an M&A transaction at a glance 4

Current trends of the German M&A market 5

Managing risks in M&A transactions 6

Types of acquisitions 7

M&A transaction at a glance 8

The life of an M&A transaction: Preparatory phase 9

The life of an M&A transaction: Pre due diligence phase 10

Deep dive: Confidentiality / non-disclosure agreement 11

Deep dive: Release and reliance letters 12

The life of an M&A transaction: Due diligence phase 13

Deep dive: Due diligence 14

Deep dive: Letter of intent 15

The life of an M&A transaction: Negotiation & signing phase 16

Deep dive: SPA deal structure, MAC and purchase price 17

Purchase price in SPAs 18

Deep dive: SPA representations and warranties 20

Deep dive: SPA remedies / limitation of liabilities 22

Deep dive: SPA indemnities and closing conditions 23

Deep dive: SPA covenants and other provisions 24

The life of an M&A transaction: Closing and post-closing 25

Deep dive: Post-closing 26

contents

The life of an M&A transaction at a glance

The M&A process is not a one size fits all process and the amount of work and thetime required for the individual steps may vary substantially. Also the level ofinvolvement of different advisors (legal, financial, strategic etc) depends on the phaseof the transaction and on the particular deal. Furthermore, the steps to be taken by thecompanies involved depend on whether one is acting as a buyer or as a seller andwhether there is a structured auction process or a one-to-one sale.

The preparatory phase of an M&A Transaction involves, inter alia, the selection of a potential target or a potential buyer, the evaluationof different options and strategies, the analysis of possible synergies, the selection of teams of advisors, informal talks with potentialcounterparts (often facilitated by the investment banks involved). The preparatory phase also encompasses a pre-due diligence phase,with preliminary structuring considerations, and, on the seller side, often also the preparation of an information memorandum, the set-up of a data room and potentially also a review of the target through a vendor due diligence exercise. In this phase, there may also besome preliminary negotiations between the parties, which usually lead to the conclusion of a confidentiality agreement.

The next step is the due diligence phase, during which the potential purchaser may conduct an investigation of the target business sothat a decision can be made whether (and under which conditions) or not to proceed with the acquisition. The findings are generallysummarised in a due diligence report. Although the seller sometimes may have undertaken a vendor due diligence and it may releaseits report to the buyer, usually within the parameters set forth by release and reliance letters, most due diligence processes areconducted from a buyers perspective. The due diligence phase also encompasses a Q&A process and management and expertmeetings and it generally ends with the submission of a final bid.

After the submission of the final bid, the seller and the prospective buyer enter into a negotiation phase, which may involve two or morebidders for a certain time. The negotiation phase ends with the signing of the sale and purchase agreements (SPA). After the signing,the preparation for closing begins, which generally includes collecting the necessary statutory and transaction-specific approvals.

Upon closing, there is often some restructuring work to do, which finally leads to the integration of buyer and target.

4

Current trends of the German M&A market

5

New challengesn Valuation

n Financing

n Deliverability

n Risk management

Material Adverse Change (MAC)Clauses / Break-up feesn Sellers continue to reject MAC

Clauses in favour of dealcertainty

n Break-up fees are still anexception

Joint ventures / minority stakesn Increased interest in joint

ventures

n Increased interest in taking aminority stake

n Family-controlled companies arewilling to take on minorityinvestors

Auction processes are lessrigorously executedn Greater opportunities for pre-

emptive bids

n Late entrants to a sale processare possible

n Bidders that act quickly anddeliver certainty have a clearadvantage

Bridging the gap in valuationn Cherry-picking assets, leaving

behind difficult-to-value /onerous assets therebyeliminating valuation challenges

n Asset carve-out light:Acquisition of specific intellectualproperty, R&D, distribution andcustomers, leaving behindassets, such as the productionsite; seller engages in interimmanufacturing until the buyersproduction is fully operational

n Earn-out clauses to bridge thevaluation gap, however manybuyers and sellers are wary ofthe challenges of such clauses

Regulatory challengesn Sellers have become more wary

of execution risks

n Strategic buyers volunteer to beresponsible for the antitrustanalysis and offer to provideundertakings to make necessarydivestitures early in the process

n Bidders that are believed tobring material antitrust risks areexcluded

Managing risks in M&A transactions

6

As the requirements on corporate governance and compliance grow, the risksassociated with non-compliance issues increase. In particular, buyers have to be awarethat M&A can be risky and they must engage in all necessary measures and steps toreduce and manage potential risks.

n Conduct an appropriate level of due diligence in connection with transactions

n Incorporate a risk-based level of compliance due diligence (risk profile, key personnel interviews, review)

n Identify, address and resolve red flags

n Adjust transaction structure if necessary

n Obtain robust representation, warranties, indemnities and covenants; ensure appropriate remedies in case of breaches andprovide for adequate substance (e.g. escrow)

n Ensure any prior misconduct shall be remedied post-transaction

n Implement any required policies, procedures and internal controls to ensure strong corporate governance and compliance

Criminal behaviour

Legal / IP / Regulatory

Weak Internal Controls / Systems

Local Market / Culture

Quality of Information

Related PartyTransactions

Complex OwnershipStructures

Tax Exposures

Corporate Governance

Covering & Preventing

Mapping & Assessing

Addressing & Remedying

Types of acquisitions

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Friendly

Hostile

Takeovers

One potential buyer

Auction

Classical acquisition

Financial

Industrial

Buy-Outs

Financial

Industrial

Business Angels

Venture Capital

Private Equity

M&A transaction at a glance

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Preparatoryphase

Decision anddefinition ofscope

Looking fortargets / buyersand approachingparties

Pre-duediligencephase

Draft teaser andinformationmemorandum;set up data room;vendor DD

Confidentialityagreements

Releaseinformationmemorandum

Release vendorDD reports onthe basis ofrelease (andreliance) letter

Duediligencephase

1st phase duediligence Letter of intent

Negotiation& signing

SPA, inparticular reps& warrantiesindemnities,purchase price

Parallelagreements maybe needed (eg.shareholdersagreement, etc.)

Pre-closing,closing &post-closing

Fulfilment ofclosingconditions

Closing: Transferof shares / assets

Q&As /managementmeetings / confir-matory DD

Binding offer / final bid

Signing: Notarialrecording maybe necessaryfor signing

Post-signing:prepare filings /prepare transfers /obtain funds

Post-closingrestructuring

Post-closingconvenants

The life of an M&A transaction: Preparatory phase

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Seller side

n Decision to sell and preparation of the transaction

n Choosing advisors and deciding which type of deal isenvisaged (asset or share deal)

n Identifying and approaching potential buyers to beinvited for the process (if transaction is not buyer-driven)

Buyer side

n Evaluating the business objectives decision to buy

n Choosing advisors

n Identifying and approaching potential targets (iftransaction is not seller-driven)

n M&A processes are generally steered by the M&A or Business Development department

n Involvement of investment bank / strategic advisors / consultants

n Legal advisors are generally not involved (at least not in-depth) in the preparatory phase

Preparatoryphase

Decision anddefinition of scope

Looking for targets /buyers andapproaching parties

The life of an M&A transaction: Pre-due diligence phase

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Seller side

n Prepare teaser and information memorandum, generally with the assistance of an investment bank; assistance of legal advisorsadvisable to avoid legal risks

n Set up data room (and index) process is usually lengthy; legal and financial advisors are usually involved

n Decide on the form of data room; trend: electronic data room coordinated either by investment bank or law firm

n If appropriate, set up due diligence team and carry out vendor due diligence

n Decide which documents are going to be released to buyer(s) in which form (blackening of confidential issues) and in whichdue diligence phase; establish red data room

n Prepare confidentiality agreements

n Prepare process letter and data room rules for due diligence

n Release information memorandum and data room index

n If appropriate, release vendor due diligence report on the basis of a release (and potentially also reliance) letter

Buyer side

n Sign confidentiality agreements

n Review teaser and information memorandum as a first basis to decide whether to proceed with the transaction

n Set up due diligence team

n Determine material thresholds for upcoming due diligence exercise

n Buyer may submit to seller a due diligence check list (or request list), listing the documents which it would ideally like to review inthe due diligence phase. The submission of such request lists prior to the due diligence exercise is however becoming more rare

n Latest point in time to involve legal advisors

n The steps taken in the pre due diligence phase depend to a great extent on whether the process is seller-driven or buyer-drivenand whether the M&A transaction takes place as a one-to-one transaction or is carried out in the form of a structured auction

n Seller-driven processes require more preparation and demand a higher degree of legal advice as of the start

Pre-duediligencephase

Draft teaser andinformationmemorandum;set up data room;vendor DD

Confidentialityagreements

Releaseinformationmemorandum

Release /reliance letterfor vendor duediligence report

Deep dive: Confidentiality / non-disclosure agreement (NDA)

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Purposen Secure sellers / targets interest in business secrets / confidential

information

n Avoid publication of intention to sell target

n Listed companies: Avoid disclosure requirements under capital marketslaws

Typical Contentn Obligation to maintain confidentiality of disclosed information

n Limit use of confidential information to a specific purpose (evaluation ofthe target)

n Specify terms of permitted disclosure to third parties and responsibility

Co-investors, banks and other finance providers

Advisors and boards (also of parent companies)

Regulators, courts and other disclosure required by law or stockexchange rules

n Listed companies: Stand-still arrangements

n Non-solicitation of sellers / targets directors and employees (notenforceable)

Pitfallsn Unclear or very broad definition of Confidential Information (scope of

confidentiality agreement)

n Loopholes through permitted disclosure without defined responsibility

n Onerous back-to-back requirements with banks, advisors and other third parties

n Stand-still arrangements (in particular for banks and larger groups)

n Exclusivity / commission obligations towards brokers

TrendsPenalty / damage clausesn Unusual

n Good market practice to avoid

Standstill arrangements for listed companiesn Usual

Non-solicitation of sellers / targets directorsand employeesn Usually included in NDAs but not enforceable

under German law

Back-to-back with banks / advisors / otherthird partiesn Usually required

n Certain professions being obliged to maintainconfidentiality (e.g. lawyers) were formerlyexcluded but are nowadays generally requiredto counter-sign

Deep dive: Release and reliance letters

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Advisors prepare due diligence reports for the beneficiaries only. Generally, thebeneficiaries are the clients. It is also not uncommon to address the reports to a thirdparty, such as the financing bank, so that this third party is treated as beneficiary of thereport and may rely on it. In all other cases, if the beneficiary wants to pass the reporton to a third party, a release letter will have to be issued. By signing a release letter, therecipient commits to not disclose any information contained in the report to third partiesand to use the report solely for the purpose of assessing the relevant transaction.

Release Lettersn Permit one party (usually the client of the report provider) to disclose the

report to another party, e.g. a seller to disclose the vendor due diligencereport to a bidder and at the same time impose confidentiality and nondisclosure obligations to further third parties

n Exclude any liability of the report provider to the other party (non-reliancebasis)

Reliance LettersIn addition, the advisors of the party passing the report on to a third partymay also issue a reliance letter conferring the new recipient the right to relyon the facts presented in the report (under certain conditions).

n Permit a third party (a beneficiary) to rely on the due diligence report

n Create liability of the report provider towards the third party for thecontent of the report

n Scope of due diligence: Remains as agreed between the client and the report provider

n Oblige the other party to not further disclose the report to third parties

n Usually contain a limitation of the report providers aggregate liability to the client and to all beneficiaries

n Exclude obligation of report provider to update the report report may be outdated

n Need to carefully assess the actual value of relying on a report prepared for a third party

TrendsRelease lettersn Typically with exclusion of liability of report

provider towards third party

Reliance letters n Market practice is divided between providing

and not providing reliance letters (CliffordChance provides reliance letters)

n Usually only for successful bidders

n Limited aggregate liability of report providertowards client and all further beneficiaries

The life of an M&A transaction: Due diligence phase

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Seller side

n Open data room for buyer(s) with first set of documents(more confidential documents are often released in asecond phase)

n Review questions generally the process is coordinated bythe investment bank and provide answers to the extentpossible and decide on whether to provide furtherdocumentation prior to the submission of a letter of intent

involving legal advisors in the Q&A process may avoidpitfalls

n Review letters of intent submitted and, as the case may be,short-list bidders

n Release second round of documents and, if appropriate,red data room

n Organize management meetings

n Circulate draft SPA

n Review final bids

n Decide which bidder(s) stays in the process

n Consider any employee information issues

Buyer side

n Review first set of documents

n Discuss findings and ascertain which information isrequired for submitting a letter of intent; potentially alsorequest for clarification of open issues (ask questions andrequest documents)

n Advisors to prepare a preliminary report with findings

n Submission of a letter of intent

n Confirmatory due diligence

n Discuss findings and ascertain which information is requiredgoing forward; if necessary, request for clarification of openissues (ask questions and request documents)

n Participate in management meetings

n Advisors often review report with findings

n Decision on whether to submit a final bid and as the casemay be, submission of final bid, potentially also includinga first mark-up of the SPA and in certain cases asking forexclusivity

n Consider any employee information issues

n The due diligence phase generally demands considerable advisory efforts and is rather intensive in terms of time

n Generally, the seller sends the potential buyer(s) a first draft of an SPA in the course of this phase, often shortly before thesubmission of a final bid by the potential buyer(s) the request to include a first buyer mark-up in the final bid documentationhas became common

Duediligencephase

1st phase duediligence /Q&As

Letter of intent

Q&As /managementmeetings /confirmatory DD

Binding offer /final bid

Deep dive: Due diligence

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Aimsn Assessing the value of the target and identifying risks

n Developing a custom-tailored catalogue of representations andwarranties to mitigate potential risks that result from defects of the target

Backgroundn Developed from the rule of caveat emptor under US law, under which

the buyer could not recover from the seller for defects in the propertythat rendered the property unfit for ordinary purposes

Scopen Separate due diligence for different areas (legal, tax / financial,

environmental, commercial, insurance)

n Legal due diligence generally referred to as legal review excludesnon-legal matters such as environmental, accounting, financial,insurance, etc.

Processn Examining the documents in the data room

n Questions and answers

n Preparing the due diligence report (legal review report)

n Discussing the results of the due diligence

Depth of reviewn Spot check

n Exhaustive due diligence of all documents (rather rare)

Format for reportsn Red flag / by exception reports are nowadays the most common although some clients still prefer full summaries of certain or all of

the documents reviewed

n Table format with action points and recommendations is common

TrendsElectronic data roomsn Currently standard

n Most documents not printable

Documents with sensitive datan Usually disclosed in data rooms with sensitive

data blacked out

Particular sensitive documents (red datarooms)n Later disclosure in the second due diligence

phase, generally to a limited group of peopleonly

n Highly confidential matters (state affairs,documents subject to bank secrecy, etc.) mayneed to be held in trust

Material threshold for reviewn Material threshold of usually 0,1% to 0,5% of

company value

Limitation of liability of law firm n Standard in reports

n Limitation to the value of the transaction (max.EUR 100,000,000)

Deep dive: Letter of intent (LoI)

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Purposen Documentation of a basic understanding or intent to

express and confirm ones interest to the other party

reduce the risk of misunderstandings

avoid either party stepping back on key elements later on

define a process for the transaction and allocate responsibilities

(sometimes) grant exclusivity, preferred bidder status or cost coverage

Legal effectn Usually non-binding declarations of intent or documentation of

preliminary agreement but legal effect depends on the wording no ruleof law

n Drafting needs to be careful and precise

n Should expressly and clearly specify legal effect of individual elements

n Form requirements to be observed, if binding, preliminary agreement isintended

n Specific provisions may be drafted so that they are binding, e.g.confidentiality, exclusivity / preferred bidder status for a certain period orcost coverage

Legal consequencesn Binding obligations can be enforced by the other party

n Breach of binding provisions can result in liability for damages

n Unclear or wrongful statements may result in liability for damages

TrendsLoI in a structured auction processn Structured auction processes often without

letter of intent

LoI in a traditional sale processn In traditional sales processes LoIs are more

common

Binding effectn Depends on wording and form

Exclusivityn Exclusivity clause often drafted as a binding

provision

Break Feesn Very unusual in Germany

The life of an M&A transaction: Negotiations & signing phase

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Seller side

n Seller generally provides the first draft of the SPA with verylimited representations and warranties

n Seller typically wishes to prepare general disclosureschedules (e.g. the full content of the data room) againstprecise representations and warranties in the SPA

n Employee notification duties

Buyer side

n Buyer generally starts working on the basis of the draftSPA provided by seller

n Extension of draft representations and warranties toprovide sufficient comfort taking into account the findingsof the due diligence exercise

n Buyer generally prefers to work with vast set ofrepresentations & warranties and generally wishes toaccept only specific information contained in specificdisclosure schedules against the representations andwarranties

n The negotiation / signing phase also includes certain measures which take place immediately after signing and which generallystart being prepared long prior to signing. These include not only efforts to obtain sufficient funds for payment of the purchaseprice (which generally occurs at closing) but also the necessary steps for the actual transfer in rem as well as the preparationof statutory / regulatory filings (see also pre-closing phase)

n The transfer of shares in German limited liability companies as well as the transfer of certain assets, such as real estate, needto be recorded by a notary notary fees are usually borne by the buyer. The use of cheaper Swiss notaries is no longerrecommended due to current jurisprudence

Key issues in the negotiation phase

n Deal structure: Asset deal vs. share deal vs. merger (consider also particular employment law issues in connection with asset deals)

n Defining and structuring acquisition vehicle

n Pre-signing restructuring measures, such as carve-outs and pre-signing consents

n Negotiation of representations and warranties, indemnities, purchase price, closing conditions, etc.

n Duty to remedy defects prior to / after closing

Negotiation& signing

SPA, in particularreps & warrantiesindemnities,purchase price

Parallelagreements maybe needed (e.g.shareholdersagreement, etc.)

Signing: Notarialrecording maybe necessary forsigning

Post-signing:Prepare filings /preparetransfers /obtain funds

Deep dive: SPA deal structure, MAC and purchase price

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Scope of the transfern Decision whether to structure a transaction as a share deal, asset deal or

as a merger depends on a number of different factors, such asorganisation and size of target and buyer, tax implications, employeesstructure of the target, etc.

Structure: signing and closing n Usually staggered in between parties fulfil closing conditions (statutory /

regulatory and other transaction-specific conditions)

n In rem transfer occurs at closing

Material adverse change (MAC) clausesn MAC refers basically to an event that may cause a significant diminution

in the value of a business

n There is a very broad range of MAC definitions and substantial attentionmust be paid to the drafting, in particular also to carve-outs from thedefinition

n MACs are buyer-friendly and strongly rejected by sellers as they in effect often give the buyer an opportunity to renegotiate thepurchase price

Purchase pricen The purchase price in SPAs may be structured as a fixed price based on the financial accounts at a certain point in time (locked

box mechanism) or it can be subject to adjustments on the basis of the closing date balance sheet

n There are several mechanisms to adjust the purchase price, such as cash free / debt free models and working capital adjustments

n While the seller typically used to prefer the locked box model and the buyer a mechanism providing for subsequent adjustment,locked box models are nowadays regarded to be advantageous also to buyers due to the certainty they offer and due to thereduced post-closing efforts The current trend is towards an increase of the locked box approach

TrendsAsset vs. share dealn Most transactions structured as share deals

n Asset deals demand detailed description ofassets in the SPA and give more room forcherry picking

MAC clausesn In approx. 1/5 of SPAs

Purchase price in SPAsFixed price vs. price adjustments

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Locked box

n Purchase price calculated on the basis of the last audited annual accounts or of interim accounts locked box date

n Risks as well as opportunities resulting from potential positive or negative developments are transferred to buyer as of thelocked box date MAC clauses and covenants can mitigate such risks

n Maximum certainty due to fixed purchase price

n Accrual of interest on the purchase price until closing may be agreed, if a positive cash flow is expected

n Debt / cash and working capital adjustments have already been included in the calculation of the purchase price on the basis ofthe accounts and as of the accounts date; no subsequent adjustment efforts, no closing date balance sheet

n Risk of adverse developments and chances economically transfers to buyer on signing

n Extensive due diligence required from a buyers perspective

n Requires tight pre-closing covenants to avoid leakage of cash or other value to the seller (no leakage covenant box needsto be securely locked)

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n Working capital adjustment models are based on an agreed target working capital amount as of closing. Upon closing,the buyer determines within a certain period of time the actual working capital, which may lead to a purchase pricereduction or increase (deviation must exceed a certain agreed percentage)

n Working capital adjustment is used to compensate the respective party for growth or decline in working capital as measuredat closing relative to an agreed balance and serves as a protection against manipulation of cash items by the seller

n Although there is an usual definition of working capital, it is always subject to agreement in the SPA. When definingworking capital, any payables and receivables towards affiliated companies with working capital character should betaken into account

n Debt free / cash free concept: Purchase price = equity value: Applying a debt free / cash free mechanism means that thenet financial liabilities are to be deducted from the purchase price

n Major difficulty is the definition of debt as it is not defined by law and needs to be precisely specified in the SPA. Particularattention is to be paid to debt-like items

n Debt free / cash free mechanism does not provide full protection from changes in balance sheet positions. Therefore,working capital adjustments are often combined with the debt free / cash free mechanism

Deb

t free / cash free

Working cap

ital

Adjustment based on closing date balance sheet

n Purchase price calculated generally on the basis of the last audited annual accounts, whereby potential adjustments pursuant tocertain reference values / milestones are taken into account. In case of subsequent deviations, the purchase price is adjusted

n Risks as well as opportunities resulting from potential positive or negative developments remain with the seller until closing

Deep dive: SPA representations & warranties

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Representations & warranties n Under German civil law, sellers are obliged to provide the sold object

without defects (Sach- und Rechtsmngel) This German statutoryregime of defects is not suitable for M&A transactions

Thus SPAs provide for representations and warranties in substitutionof the general statutory regime

n Representations and warranties typically depend on the scope of the duediligence, which may be unreliable and generally cannot cover eachaspect of the business relevant for the buyer

Ownership of shares and IP cannot be verified

Compliance issues such as data protection, anti-corruption or moneylaundering

n Seller usually wants to disclose as much as possible againstrepresentations and warranties, i.e. not give warranties in relation to allaspects disclosed to buyer in the bidding process may have adverseeffect on overall bid valuation

n Reps and warranties are typically subject to a time limit whichgenerally varies between 6 and 24 months. Title, tax andenvironmental matters are often excluded from the limitation period orhave a longer limitation period

n Qualifications

Knowledge qualifier: To the sellers best knowledge / positiveknowledge / no qualifier

Disclosure: Except as stated in Schedule XX

TrendsReference date for reps & warrantiesn Bring-down to closing in 60% to 70% of the

cases

De minimis for reps & warranties n In approx. 50% of SPAs; number is increasing

Baskets for reps & warranties n In approx. 50% of SPAs

n Basket amounts in 50% of the cases to > 1%of the purchase price

n When basket is agreed, recovery is on a firstEuro basis in approx. two thirds of the cases

Cap on reps & warranties n Most SPAs with reps & warranties contain

liability caps

n In approx. half of the SPAs with caps on reps &warranties, the liability cap amounts to > 50%of the purchase price

Carve-outs from liability caps n Often exclusion of title, tax and less often,

environmental issues

Insurance of reps & warranties n Is getting more common

Deep dive: SPA remedies / limitation of liabilities

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Remedies for breach of warranties n Primary remedy: Seller has to establish such condition of the sold business as described in the relevant representation or warranty

n Secondary remedy: Compensation in money usually considered as a reduction of the purchase price

Knowledgen Buyers knowledge usually excludes sellers liability. Thus sellers best defense is proper disclosure prior to signing. Whether

deemed knowledge due to disclosure in the course of due diligence excludes liability depends on the agreement reached. In anycase, buyers knowledge is usually limited to the knowledge of certain individuals

No double countingn Double counting is to be avoided, in particular from a sellers perspective. Thus, links between liability for breach of

representations and warranties and purchase price adjustment (debt, working capital), indemnities and other SPA provisions, risksalready included in the purchase price calculation (known risks) and recovery from third parties, e.g. insurance or contractors,should be taken into account

De minimis, thresholds, capsn De minimis: Individual claim needs to exceed a certain value before being eligible for compensation

n Thresholds: Aggregate claims need to exceed a certain threshold before buyer can raise claims against the seller. May be in theform of a deductible (seller only has to compensate amounts exceeding threshold) or on a first Euro basis (seller has tocompensate full damage including threshold amount)

n Cap: Overall limitation of sellers liability. Typically not structured in the same way for all warranties / under the SPA

Buyer is obliged to mitigate damagesn Obligation to mitigate is a general duty under German law

n Specific duties in respect of certain liabilities can be addressed in the SPA

Process for claimsn Buyer is usually required to notify seller of claims in writting without undue delay

n The parties are obliged to adhere to the formalities and processes agreed in the SPA; the legal consequences of a breach of suchformalities are usually extensively discussed by the parties

n Seller usually retains control over defense against third party claims

Deep dive: SPA indemnities and closing conditions

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Indemnities n Indemnities are more buyer friendly than warranties: Whereas a warranty

is a contractual declaration of the existence of a particular state of affairs,an indemnity is a contractual promise to reimburse the other party for aparticular type of liability, in case such liability arises

n Indemnities protect against risks and contingent liabilities which have notbeen taken into account in the calculation of the purchase price butwhich have yet been identified as potential risks

n Typical indemnities

Taxes relating to pre-closing periods (but resulting from taxassessments post-closing)

Pending litigation

Continuing liability from contracts with third parties with limited or no benefit to the buyer

Environmental liability

n Mostly tailor made, no market standards except for tax indemnities

Specific and clear definition of scope (particular events, liabilities, claims)

Specifically address buyers cooperation and mitigation duties

Seller usually retains right to defend against third party claims

Closing Conditionsn Closing is typically subject to certain closing conditions, which may be transaction-specific and / or such as required by law

n Statutory / regulatory conditions are in particular merger control approvals, regulatory approvals in particular in the financial sectoretc. Furthermore, the acquisition of at least 25% of the shares in German companies by non-EU / EFTA buyers is also subject toclearance by the German Ministry of Economics and Technology

n Transaction-specific conditions may be third party waivers of rights to terminate material contracts for change of control (sharedeal), third party consents to the transfer of material contracts or assets (asset deal), completion of material preparation actions bythe seller etc.

TrendsDe minimis and thresholds in indemnityclausesn Often not subject to thresholds or de minimis

amounts

Cap on indemnity clauses n Often uncapped

Deep dive: SPA covenants and other provisions

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Covenants n A covenant is an undertaking of a party to perform or refrain from performing

an action during the period between signing and closing (pre-closingcovenants) or for a certain time after closing (post-closing covenants)

n Pre-closing covenants: After signing, the buyer is obliged to acquire thebusiness at closing. The buyer therefore has an interest in protecting the soldbusiness against material changes. Thus, the seller often undertakes to run thesold business in the ordinary course and in accordance with past practice.Typical measures requiring buyers prior consent

Change of articles of association

Conclusion of company agreements

Reorganisation or liquidation of companies

Sale or purchase of material assets

Capital expenditures above a certain threshold

Conclusion of high-volume or long-term agreements

Entering into new financial debt positions

Changes to the practice of collecting trade receivables or paying trade payables

Changes to employment terms and conditions, shop agreements, pension arrangements

Changes to accounting practice

Further covenants required for locked-box concept (no leakage)

n Too tight covenants should be avoided as they could violate antitrust laws

n Typical post-closing covenants are the non-compete and non-solicitation clauses

Seller undertakes to refrain from engaging in a similar business for a specified period of time

Seller undertakes to refrain from soliciting sellers / targets directors and employees for a specific period of time; such covenantis common but not enforceable under German law

Responsibilities, long stop date, break feesn Right to withdraw if conditions are not fulfiled on a defined long stop date

n Break-up fee / compensation in case of withdrawal depending on responsibility still an exception

Governing lawn Litigation or Alternative Dispute Resolution

TrendsPost-closing covenantsn Relatively common

Non-compete covenantn In approx. half of the SPAs

Non-solicitation covenantn Common but not enforceable under

German law

The life of an M&A transaction: Closing and post-closing

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Seller side

n Compliance with any post-signing covenants previouslyagreed with the buyer; seller usually has to run thebusiness in accordance with past practice and is generallydependent on buyers consent for certain transactions

n Whereas buyer is typically responsible for statutory andregulatory filings necessary for clearance, both, seller andbuyer, may be responsible for the fulfillment of anytransaction-related conditions

n Receipt of purchase price and delivering confirmation

n Effect transfer agreements (notarisation may be necessary)

n Compliance with any post-closing covenants

n Follow up on potential purchase price adjustments

Buyer side

n Cooperation with seller regarding compliance with post-signing covenants (e.g. consent for transactions shouldnot be unreasonably withheld)

n Statutory and regulatory filings required for closing

n Procure fulfillment of transaction related closing conditions(jointly with seller)

n (Finalising) establishing acquisition vehicle

n Payment of purchase price

n Effect transfer agreements (notarisation may benecessary)

n Tackle any restructuring and integration measures thatmay be necessary the end is also the beginning

n Drafting balance sheets as of the effective date ifapplicable and follow up on potential purchase priceadjustments

n Be aware of limitation periods for representations andwarranties and indemnities

n In the period between signing and closing the parties procure the fulfilment of the closing conditions necessary for the transferof the business to become effective

n Upon closing, the newly acquired company will need to be integrated into the corporate structure of the buyer group. Thus,the corporate restructuring will almost always be inevitable

Pre-closing,closing &post-closing

Fulfilment ofclosingconditions

Closing: Transferof shares / assets

Post-closingrestructuring

Post-closingconvenants

Deep dive: Post-closing

26

What needs to be done n Strategic integration: The newly acquired company will need to be

integrated into the corporate structure of the buyer group. Hence,corporate restructuring will almost always be inevitable. Corporaterestructuring is frequently driven by tax considerations and will usually berequired to achieve the synergy effects targeted by the acquisition. Thegoal may, for example, be to optimise the financing structure or toreorganise group companies to simplify the overall group structure.Typical post closing measures may be a merger, a change of thecorporate form, a delisting, a squeeze-out or the sale of a part ofthe target.

n Operational: In the operational area, this is likely to extend beyond thereorganisation of sales systems and logistic processes to includerelations with customers and suppliers.

n Due diligence findings: The period immediately after closing will also bethe obvious time to remedy any weaknesses that may have come to lightin the legal review process - such as standard agreements or terms andconditions of the business that are invalid or inappropriate.

n IT: The integration of IT systems will also call for a comprehensive review of all the relevant licenses, maintenance and serviceagreements.

n Human resources: As regards human resources, the appointment of new managers, a realignment of organisational andremuneration structures as well as a restructuring of the companys pension scheme may be required.

n Regulatory issues: The period just after closing is also the right time to rectify any defects or gaps in regulatory permits and tominimise any risk of existing pollution by actively engaging in environmental management.

Best practicesRestructuring and integrationn Provide for sufficient resources

n Ensure that integration team also comprisesmembers of the transaction team

n Ensure sufficient flow of information from dealteam to integration team

n Involve integration team during due diligenceexercise and contract negotiations

n Address and resolve any due diligence issuesduring integration

*Clifford Chance also has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh

Worldwide contact information33* offices in 23 countries

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www.cliffordchance.com

Clifford Chance Partnerschaftsgesellschaft von Rechtsanwlten, Wirtschaftsprfern, Steuerberatern und SolicitorsFrankfurt am Main, AG Frankfurt am Main PR 1000, Summer 2011

This Brochure does not necessarily deal with every important topicor cover every aspect of the topics with which it deals. It is notdesigned to provide legal or other advice.

Further information on Clifford Chance Partnerschaftsgesellschaft, inparticular with regard to the details to be provided pursuant tosection 2,3 DL-InfoV, can be obtained at www.cliffordchance.com.

Abu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Doha Dubai Dsseldorf Frankfurt Hong Kong Istanbul Kyiv London Luxembourg MadridMilan Moscow Munich New York Paris Perth Prague Riyadh (co-operation agreement) Rome So Paulo Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C.Clifford Chance has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh

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