Analysis of a Term Sheet for a VC Transaction

What is a Term Sheet?

In the venture capital community space, a term sheet outlines the terms for a deal; it serves as a letter of intent given to a company seeking investments by a venture firm/ seeking a strategic partnership or takeover in order to outline the proposed terms for an investment/ acquisition transaction between the two parties. A term sheet has two important functions: it summarizes all the important financial and legal terms related to a contemplated transaction; and it quantifies, both in numbers and qualified terms, the value of the transaction or the venture capital financing. Typically, a term sheet is not a legal and binding document but is often considered a ‘gentleman’s promise’, from which the parties will not deviate 180 degrees. Often this ‘gentleman’s promise’ is linked to reputation an investor or a venture capital firm.

If the terms for a financing or acquisition as captured in the term sheet are agreed to by the parties, the document then serves the basis by which to draft the legal document surrounding the class of securities contemplated by the financing and to make modifications to the articles of association, where necessary. The value of a term sheet is its ability to focus parties in a deal on the essence of the deal prior to initiating costly legal drafting and to move them to close the transaction.

As a part of the process of agreeing on the terms of a term sheet, the two parties (the investor and the investee (typically represented by CEO or a core executive team of the company seeking investment)) participate in a series of discussions, with the expectations from the investors that the company will accept their proposed terms.

When an entrepreneurs or the company(ies) receives the first term sheet, they should consult their lawyer and decide whether the economics of the deal are close to what they expected them to be. If not so, then they should negotiate and square back the term sheet to the venture capitalist and their lawyers and finalize the tentative terms of the proposed transaction.

Section by Section Analysis of a Term Sheet

1. The Preamble: There can be certain exclusions or assumptions as to the length of time that a term sheet will remain in place, provisions as to entrepreneur’s ability to shop a deal to other investors, language pertaining to any quiet period or lock-up period.

2. Opening Information: Fairly standard provision and it has information on name of the parties, binding value of the term sheet and documentation of the fact that the proposed investment/ transaction is specifically subject to signing of definitive documents, legal due diligence, and other conditions precedents.

3. New Securities offered/ preferential issue: Information on number of equity shares/ preference shares/ options to be issued to the investor/ venture capitalist. This may have reference to SEBI ICDR guidelines on preferential allotment of equity shares (in case of listed companies). This clause could be expanded to include, board rights, level of influence etc over the company.

4. Total amount raised, number of shares, and purchase price per share

5. Post-Financing/ acquisition capitalization: The purpose of the post-financing capitalization section is to summarize what the capital structure of the company will look after the proposed new financing/ acquisition.

6. Liquidation Preference: This doesn’t necessarily have to be devastating for a venture capitalist. This tool enables favorable treatment for preferred shareholders in the event of liquidation.

7. Redemption: One way for venture capitalists to ensure the company does not become a lifestyle company. The purpose of the redemption clause is to make certain that the investors do not invest in companies that are unable to generate liquidity.

8. Conversion and Automatic Conversion: The purpose of this clause is to enable preferred shareholders to convert in the event of a liquidity event that is likely to generate a return that is higher than the multiple that is prescribed as mandated in the liquidation preference section (such as IPO of the company).

9. Dilution: Dilution clauses are the single most important tool for investors who want to ensure that any subsequent financing will, at the very least, not dilute the value of their investments below the price they paid in prior round.

10. Voting Rights

11. Protective Provisions: This would include prior approval in cases of merger, reorganization, sale, amendments to the company’s certificate of incorporation, be-laws, increase or decrease in the company’s number of authorized shares or the size of the board, declaration of dividends. 

12. Board Composition

13. Information Rights

14. Share Purchase Agreement: This clause contain a brief on some of the important clauses in a share purchase agreement along with representations, warranties etc.

15. Conditions Precedent: This is provided more for education purposes, because it is often not necessarily included in entirety in most term sheets. This clause has information on completed due-diligence and customary share purchase agreement, satisfactory review of company’s compensation program etc.

16. Use of proceeds

17. Additional definitive agreements: Non-disclosure and no-competition agreements.

18. Restriction Agreements: such as right of first refusal, right of first offer,Tag-along rights, drag-along rights etc.

19. Miscellaneous: Clauses include, confidentiality, closing date, expenses, employee matters, legal counsel clauses etc.

Drafting and Negotiating Indemnity clause under a Merger Agreement

A press release dated 15 February, 2012 (Press Release) issued by Telenor Group (Telenor) seeking indemnification from their Indian counterparts, Unitech Limited (Unitech) regarding the cancellation of the telecommunication licenses (Licenses) by the Supreme Court of their joint-venture, Uninor Limited (Uninor) drew my attention to a seemingly boilerplate provision used/ written  in a typical merger/ share purchase/ share subscription agreement (Merger Agreement)- Indemnification.  This note is not about the 'Telenor- Unitech deal-what went wrong?' or the implications of Supreme Court's order but is an attempt to understand (a) how a typical indemnification clause is drafted in a Merger Agreement and (b) how to negotiate an indemnification clause in a Merger Agreement from the perspective of the buyer (Buyer) and the seller (Seller).

According to the Press Release:

“The legality and validity of the licenses was a fundamental term of the share subscription agreement between Telenor Group and Unitech Limited. We believe that the Supreme Court’s cancellation of the Unified Access Service Licenses (UASL) conclusively demonstrates a clear breach of Unitech’s warranties,” said Pål Wien Espen, Group General Counsel, Telenor Group.

In the share subscription agreement between the partners, Unitech Ltd. has irrevocably and unconditionally agreed to indemnify and hold harmless the Telenor Group from all damages which may be suffered as a result of breach of any of the agreed warranties.

“The fact is that Uninor as a consequence of the judgment will no longer hold any UASLs. Telenor will therefore exercise its entitled right under the share subscription agreement to hold Unitech Ltd. liable to indemnify and compensate Telenor Group for its investment in India,” said Pål Wien Espen. [Underlines and italics are mine and Emphasis implied]

Undoubtedly, its an inter-play of word and phraseology used in the share subscription agreement (SSA) mainly the conditions precedents clause, representations and warranties clause (Reps & Warranties) and indemnity clause (Indemnity or Indemnity Clause), which would determine whether the claims of Telenor would be successful. 

Drafting Indemnity Clause

Indemnity Clause needs to be drafted carefully and cannot be a mere boilerplate provision copied and pasted from the earlier precedents of the Merger Agreements available to a law firm.  Typically an Indemnity Clause may be of two types- (a) General Indemnity Clause- concerning with the general breach of Reps & Warranties or any other covenants under the Merger Agreement, and (b) Special Indemnity Clause- concerning with certain special/ certain circumstances regardless of the breach on the part of Seller or Buyer e.g. certain pending litigation, tax issues, environmental issues etc).  Some of the issues encountered during the drafting of Indemnity Clause are discussed below:

(A) Who is indemnifying whom – a Merger Agreement should in clear terms specify who is an indemnifying party and who is an indemnified party.

(B) “..hereby agree to jointly and severally indemnify, defend and hold harmless”- This language is typically used in the first paragraph of an Indemnity clause.  It should be kept in mind that words- indemnify, defend and hold harmless all have different meanings under varied circumstances.  A party may have duty to defend (for e.g. in law suits) but may not indemnify the other party.  To cover this a broad array of situations may be inserted (whichmay be left open ended (beneficial for Buyers)) defined as 'Loses' to cover the harm done to the  indemnified party.

(C)  “...directly arise out of, result from or may be payable by virtue of any breach”-  A Merger Agreement may use words 'due to' the conduct of indemnifying party (this may be good for the Sellers!), however more general y the language 'directly arising' is used when Buyer is in a strong position.

(D) To provide significant clarity in the Merger Agreement, the parties may resolve to negotiate and define words like 'Claim', 'Indemnifying Party Conduct', 'Damages'.

(E) “The liability of Seller in respect of any Claim shall be equal to...”- A Merger Agreement may specify the monetary limits of the Seller under a Basket, Ceiling or threshold clause.  Buyers may like this to be open-ended or as large as possible.

(F) Failure to give notice clause – In a typical Merger Agreement, certain procedures are described for claiming the damages from the indemnifying party.  However, in some case inadvertently, Buyer may miss some steps to claim damages, to cure this a language is generally inserted to waive any of the failure on the part of Buyer.

(G) Jointly or Severally- Often there may be situations, when Sellers are accompanied by scores of its affiliates, which may range from promoter of the Seller to the holding company of the Seller who may make good the losses for damages incurred to the Buyer. 

(H) Time Limitations/ Survival clause: The parties will need to agree upon the length of time during which indemnification claims must be raised.  The length of time may be different for different items. For example, the time for raising an indemnification claim for breaches of representations and warranties may be two years while claims for fraud may be unlimited as to time. By not specifying a time limitation, the length of time for raising claims will be controlled by the applicable statute of limitations.

Negotiating Indemnity Clause

Some of important and common issues involved in an Indemnity Clause are discussed below:

(A) Seller's indemnification of Buyer for breaches of Reps & Warranties

• By far the most common matter with respect to which indemnities are given by the Sellers to the Buyers. 
• From Buyer's perspective it would be helpful to state clearly from when does the duty to indemnify arises- signing or closing under the Merger Agreement, in my view the earlier the better.
• From the Seller's perspective, it would be better to fully disclose its liabilities and potential liabilities/ risk factors to the Buyer during the due-diligence process so that a milder Reps & Warranties clause may be drafted in Seller's favor.  Typically, an anti-sandbagging provision is inserted in such cases, limiting the liabilities of a Seller.

(B) Buyer's indemnification of Seller for breaches of Reps & Warranties

• This is largely used as a matter of reciprocity.
• In a typical Merger Agreement, Buyer may be liable to indemnify/ make good the losses incurred by the Seller acting on the representations of the Buyer.

(C) Buyer's post-closing activities

• In a Merger Agreement, indemnification is generally drafted as a post-closing matter, with the parties tacitly agreeing to leave the resolution of pre-closing breach of contract claims in the event the deal does not close, and the appropriate measure of the damages, to a court of competent jurisdiction. 
• From Buyer's perspective it is important to draft this provision carefully, as Buyers would not like to the burdened by Seller's activities pre-signing or pre-closing.

(D) Third Party Claims

• From the Buyer's perspective, it would be prudent to ask for Seller's indemnity for third-party claims in cases where the root cause of the third-party rights/ claims arises from factor existing pre-closing of the Merger Agreement.
• Depending on whats the importance of this clause of the Seller, Seller's counsel may draft for no liability for Seller's in a case of third-party claims.

(E) Escrow

• Along side of a Merger Agreement, typically an escrow agreement (Escrow Agreement) is also executed between a Buyer and a Seller. 
• Under the terms of Escrow Agreement, typically an amount of upto 10-15% of the deal size is deposited with a third-party, which is typically a financial institution who keeps the money for the benefit of Buyer is case  liability for any breach by Sellers arises. 
• Time period of such an escrow is generally 12 or 18 months depending upon how the Escrow Agreement and Merger Agreement is negotiated by the parties.

(F) Non-reliance clause

• A typical ‘non-reliance’ clause is intended to limit a Buyer's ability to make a Rule 10b-5 claim by prohibiting the buyer's reliance on information not explicitly included or incorporated in the purchase agreement itself.  
• Seller should consider requesting non-reliance clause under the Merger Agreement.

(G) Illegality committed by the indemnifying party

In most of the jurisdictions there are strict anti-bribery laws, however, they are not strictly followed.  Often these days some of the private equity investors insist on inserting a provision as to indemnification if any bribery is committed or proved.

(H) Payment on Indemnification 

Many times, the question of when an actual indemnification will occur is not clearly addressed in the Merger Agreement. Not addressing this issue may not be a bad idea for the Seller. However, the Buyer should require that indemnification occur within some established time period, such as within 30 days of notice to the Seller of any claim, expense or obligation incurred by the buyer.

In addition to above, subject to negotiations between the parties certain specific Indemnity Clauses like Director's liability, insurance claims, third-party environmental damages claims, materiality qualifiers, major litigation crossing certain threshold amount may be inserted in a Merger Agreement.

Leveraged Buy-out of Kinetic Concepts Inc. by Apax Partners led consortium

This note deals with one of the famous deals of the year- acquisition of Kinetic Concepts Inc., (KCI or Company or Target), a Delaware corporation, a leading global technology company in the area of high-technology therapies and products for wound care, tissue regeneration and therapeutic support system markets by investment funds advised by Apax Partners (Apax Partners) and controlled affiliates of Canada Pension Plan Investment Board (CPPIB) and Public Sector Pension Investment Board (PSPIB) (KCI, Apax Partners, CPPIB and PSPIB are collectively referred as Parties and Apax Partners, CPPIB and PSPIB and their affiliates are collectively referred as Sponsors) and discusses in brief (a) the structure employed by the Parties for the acquisition and (b) the ‘financing clause’ under the merger agreement (Merger Agreement) signed between the Company and the entities controlled by the Sponsors.  

What in my view makes this acquisition deal interesting is that (a) the management was not very much interesting in running the Company, and (b) this happens to be a classic leveraged buy-out (LBO) transaction involving the issue of junk bonds for debt financing, which the US markets have seen in recent times.

Structure of the LBO transaction

Under the Merger Agreement executed on 12 July, 2011 between KCI, Chiron Holdings, Inc., (Chiron Holdings or Parent), a Delaware corporation, and Chiron Merger Sub Inc., (Chiron Merger Sub or Merger Sub), a Texas corporation and a wholly owned subsidiary (WoS) of Chiron Holdings, Chiron Merger Sub will merge with and into KCI (Merger) under the Texas Business Organizations Code and KCI will become WoS of Chiron Holdings, an entity owned by a consortium comprised of investment fund advised by Apax Partners and controlled affiliates of CPPIB and PSPIB (Chiron Holdings, Chiron Merger Sub, Apax Partners, CPPIB and PSPIB are collectively referred as Acquirers).  If the Merger is completed, shareholder of KCI will receive $68.50 per share in cash from the Acquirers (estimating the transaction value of KCI acquisition upto $6.1 billion) and the Company would be delisted from the New York Stock Exchange (NYSE) and made private.

 Financing clauses under the Merger Agreement

Among other things, the most important clauses of the Merger Agreement are ‘section 4.7’ and ‘section 6.15’ concerning with ‘Financing’ of the Merger transaction (Financing Clauses).  Under the Financing Clauses, the Merger/ acquisition would be funded by (a) equity financing up to $1.75 billion to be provided by the Sponsors to the Parent and Merger Sub (Equity Financing) and (b) borrowing of up to $2.6 billion under a senior secured term loan facility and $2.15 billion in aggregate principal amount of senior notes (or, to the extent those are not issued at or prior to the closing of the Merger, $900 million in senior unsecured bridge loans and $1.25 billion in senior secured second lien bridge loan) (Debt Financing).

               (a)   Equity Financing

Pursuant to equity commitment letter dated 12 July, 2011 the Sponsors (Apax Europe VII-A, L.P., Apax Europe VII-B, L.P., Apax Europe VII-1, L.P., Apax US VII, L.P., Port-aux-Choix Private Investments Inc. and CPP Investment Board (USRE V) Inc.) have committed to provide an aggregate equity contribution in the amount of approx. $1.75 billion to Chiron Holdings for the purpose of funding the equity portion for the financing contemplated under the Merger Agreement.

(b)   Debt Financing 

Pursuant to the debt commitment letter dated 12 July, 2011, Bank of America, N.A., Credit Suisse AG, Cayman Islands Branch, Morgan Stanley Senior Funding, Inc., Royal Bank of Canada and UBS Loan Finance LLC (Lenders) have committed to provide Merger Sub borrowings of up to $2.8 billion under senior secured loan term and revolving facilities and $2.15 billion in aggregate principal amount of senior notes (or, to the extent those are not issued at or prior to the closing of the Merger, $900 million in senior unsecured bridge loans and $1.25 billion in senior secured second lien bridge loans), on the terms and subject to the conditions set forth in the debt commitment letter.

Among other things, the obligations of the Lenders to provide debt financing under the debt commitment letter are subject to a following conditions:

•   consummation of the Merger in accordance with the Merger Agreement;
• execution and delivery of the definitive credit agreements and delivery of customary closing documents and legal opinions, including a solvency certificate;
• delivery of an offering document for use in a Rule 144A offering involving senior secured and senior unsecured notes, the proceeds of which would be used to complete the Merger and related transactions, and other data and information for use in such offering;
• expiration of a 20 consecutive business day marketing period  with customary blackout periods to seek placement of the notes with qualified purchasers 
• As a matter of market practice, the debt commitment letter was not subject to due diligence or a “market out” condition, which would allow the Lenders not to fund their respective commitments if the financial markets are materially adversely affected.

Further, under section 6.15 (c), prior to the closing, the Company shall and shall cause its subsidiaries to, and shall use its reasonable best efforts to provide to Parent and Merger Sub, at Parent’s sole expense, all reasonable cooperation reasonably requested by Parent necessary in connection with the financing, including:

• furnishing Parent and Merger Sub and their Financing sources required in registration statements on Form S-1 by Regulation S-X and Regulation S-K under the Securities Act, 1933 (Securities Act) and of a type and form customarily included in private placements pursuant to Rule 144A under the Securities Act;
• participating in a reasonable number of meetings, presentations, road shows, due diligence sessions, drafting sessions and sessions with rating agencies in connection with the financing;
• assisting with the preparation of customary materials for rating agency presentations, bank information memoranda, offering documents, private placement memoranda and similar documents required in connection with the financing;
• using reasonable best efforts to obtain accountants’ comfort letters and legal opinions as reasonably requested by Parent and facilitate the pledging of collateral in connection with the financing, including, executing and delivering any customary pledge and security documents (including security documents to be filed with the United States Copyright Office and the United States Patent and Trademark Office to register copyrights, patents and trademarks, as applicable, of the Company and its subsidiaries to the extent required in connection with the Financing), currency or interest hedging arrangements or other definitive financing documents or other certificates, legal opinions, surveys, title insurance and documents as may be reasonably requested by Parent (including a certificate of the chief financial officer of the Company with respect to solvency matters as of the Closing, on a pro forma basis); and
• assisting Parent in connection with its amendment of any of the Company’s or its subsidiaries’ hedging, swap or derivative arrangements on terms satisfactory to Parent.

 
Under the Form 8-K filed with the US Securities and Exchange Commission (SEC) on 11 October,    2011 the Company, KCI USA Inc., and investment funds advised by the Sponsors announced that Chiron Merger Sub, intends to commence an offering on or about 11 October, 2011, of $1,650 million in aggregate principal amount of second lien senior secured notes due 2019, comprised of a Dollar tranche and a Euro tranche, and $900 million in aggregate principal amount of senior notes due 2019 (collectively, the Senior Notes).  Upon consummation of the acquisition, the Company and KCI USA, Inc. will assume all of the obligations of Merger Sub under the Senior Notes and will become the co-issuers of the Senior Notes. 

Further, according to the Form 8-K filed with the SEC on 4 November, 2011, the Merger/acquisition was completed (consummation of acquisition) and it was announced- ‘In connection with the consummation of the acquisition, KCI and KCI USA obtained approximately $2,500 million of senior secured financing under new credit facilities and issued $1,750 million aggregate principal amount of second lien senior secured notes due 2018 and $750 million aggregate principal amount of senior notes due 2019.  The new credit facilities and the second lien senior secured notes will be guaranteed by certain of KCI’s and KCI USA’s parents and subsidiaries and will be secured by substantially all of the assets of KCI, KCI USA and certain of their parents and subsidiaries.  The senior notes will be senior obligations of KCI and KCI USA and will be guaranteed on a senior basis by certain of their parents and subsidiaries.  KCI used the net proceeds from the new credit facilities and the notes offerings to pay the consideration under the merger agreement and related transactions, to refinance existing debt and to pay certain costs and expenses of the transactions. 
 
It is pertinent to note that the total debt raised by KCI post-Merger/ acquisition by Sponsors is equal to 7550 million, which is much more than as required under the debt commitment letter provided by the Lenders.  Now, the balance-sheet of KCI is highly leveraged and now it is upto the performance of Sponsors how they run the Company and repay the debt and exit out of the Company in near future.

Two-track transaction structure: case of acquisition of Immucor, Inc., by TPG Partners VI, L.P.

This note discusses in brief the two-track transaction structure (TTT Structure) generally employed in the United States for acquisitions of the corporations and for this purpose have considered the case of acquisition of Immucor, Inc., a Georgia corporation (Immucor or Target) by TPG Partners VI, L.P., a Delaware Limited Partnership (TPG Partners) as a base model.  Further, the note also discusses in brief the salient features of the merger agreement signed between Immucor and TPG Partners.

Transaction Structure

Under the terms of the merger agreement (Merger Agreement) signed on 2 July, 2011, between Immucor, IVD Holdings Inc., a Delaware Corporation (IVD Holdings or Parent), which is controlled by TPG Partners and IVD Acquisition Corporation, a Georgia corporation (Purchaser or Merger Sub) (Parent, Merger Sub, Immucor are collectively referred as Parties, and Parent, Merger Sub are collectively referred as Acquirers)) pursuant to consummation of tender offer (Tender Offer) in accordance with procedure laid under the Securities Exchange Act, 1934 (SEA), Merger Sub would acquire the share of Immucor from the shareholders tendering their shares under the Tender Offer at a purchase price of $27 per share and thereafter upon satisfaction or waiver of certain conditions, Merger Sub will be merged with and into Immucor (Merger), with Immucor continuing as the surviving corporation in the merger and a wholly owned indirect subsidiary of Parent.  

TTT Structure under the Merger Agreement

Under the terms of Merger Agreement, the Parties agreed to complete the Merger whether or not the Tender Offer is complete.  If the Tender Offer is not completed, the Parties agreed that the Merger could only be completed after the receipt of shareholder approval of the Merger Agreement at the special meeting.  Under a typical TTT Structure acquisition/ merger, the Tender Offer under SEA and the Merger under the State’s corporation law (here it is Georgia Business Corporation Code) are independent of each other and often runs parallel to each other.  The Target, parallely solicits proxies for the special meeting to obtain shareholder approval of the Merger Agreement to be able to consummate the Merger regardless of the outcome of the Tender Offer.  However, if the Tender Offer bid is successful and the Acquirer acquires more than 90% of the outstanding shares (95% shares in some States) or in certain qualified situation exercises Top-Up Option, discussed below and reach 90% shareholding level and therefore resultantly is in a position of effect short-form merger, then there is no requirement of special meeting of the shareholders to effect Merger.

The TTT Structure for the Tender Offer enables the Target’s shareholders to receive the cash price pursuant to the Tender Offer in a relatively short time-frame (and reduce the uncertainty during the pendency of the transaction), followed by the cash-out Merger in which the Target’s shareholders that do not tender in the Tender Offer will receive the same cash price as is paid in the Tender Offer.  In addition TTT structure permits the use of a one-step Merger, under certain circumstances, in the event the Tender Offer is unable to be effected in a timely manner.

Salient features of the merger agreement signed between the Parties

The Merger Agreement signed between the Parties had several boiler plate provisions typical to a merger agreement.  Among other things, some of the important provisions are discussed below:         

• Top-Up Option: Pursuant to the Merger Agreement, Immucor granted to Purchaser an irrevocable option to purchase at the Offer Price an aggregate number of Shares equal to the lowest number of Shares that, when added to the number of Shares owned by Parent, Purchaser and their affiliates at the time of such exercise (after giving effect to the Offer Closing), will constitute one Share more than 90% of the outstanding Shares on a fully-diluted basis.

• Equity Financing: In connection with the Merger Agreement, Parent received an equity commitment letter from the TPG Fund, dated 2 July, 2011,pursuant to which the TPG Partners has committed to purchase equity securities of Parent, at or prior to the Merger Closing, with an aggregate purchase price of up to $691 million, for the purpose of funding a portion of the aggregate offer price and/or the aggregate per share merger consideration, as applicable, required to be paid pursuant to the Merger Agreement and the transactions contemplated thereby, as well as related fees and expenses.

• Debt Financing : Purchaser received a debt commitment letter, from Citigroup Global Markets Inc., which, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC, to provide $1.1 billion in Debt Financing, consisting of a $600 million senior secured term loan facility, a $400 million senior unsecured bridge facility and a $100 million senior secured revolving facility.

• Limited Guaranty: In connection with the Merger Agreement, the TPG Partners executed and delivered to the Target a limited guaranty (Guaranty), dated 2 July, 2011.  Pursuant to the Guaranty, the TPG Partners has irrevocably and unconditionally guaranteed the due and punctual payment by Parent to the Target of $90.0 million, when required to be paid under the terms of the Merger Agreement.

Acquisition of Motorola Mobility Holdings, Inc. by Google Inc.

This note provides a brief overview of  the ongoing merger deal- acquisition  of shares (Merger Deal) of Motorola Mobility Holdings, Inc. (Motorola or the Target) by Google, Inc. (Google or the Buyer or Acquirer) through its wholly owned subsidiary (WoS), RB98 Inc. (RB98) and discusses in brief, (a) the structure of the deal, (b) time lines involved in structuring and negotiating the merger agreement (Merger Agreement), (c) procedure involved under Delaware General Corporation Law (DGCL), Securities Act, 1934 (Exchange Act) and Hart–Scott–Rodino Antitrust Improvements Act, 1976 (HSR Act) for Merger Deal to go through, (d) business strategy behind the Merger Deal, and (e) the salient feature of the Merger Agreement signed between RB98, Motorola and Google (collectively referred as Parties) dated 15 August, 2011.

Structure of the Merger Deal

For the purpose of facilitating Google’s acquisition of Motorola, Google formed/ incorporated RB98 in the state of Delaware under DGCL (it must be noted that Google and Motorola both are incorporated under the laws of state of Delaware under DGCL).  Under the terms of the Merger Agreement (Terms of Agreement), upon consummation of proposed merger, RB98 will merge with and into Motorola and as a result of the merger, the separate corporate existence of RB98 will cease and Motorola would be the surviving corporation in the merger and will continue as a WoS of Google. Further under the Terms of Agreement, if the merger is completed, by virtue of the merger, each share of the Motorola common stock issued and outstanding immediately prior to the effective time of the merger will be cancelled and converted into the right to receive $40 per equity in cash (without interest and less any applicable tax withholdings).

Following the completion of merger, among other things:

•  Current shareholders of Motorola would cease to have direct or indirect ownership interest in Motorola;
• Motorola common stock will be de-listed from the New York Stock Exchange (NYSE) and deregistered under the securities laws and as a result Motorola will become a privately held corporation; and
• Each share of common stock of RB98 will constitute the only outstanding shares of capital stock of the surviving corporation i.e., Motorola.
  

Time lines involved in structuring and negotiating the Merger Agreement

As per the preliminary special proxy statement (Proxy Statement) filed with the U.S. Securities and Exchange Commission (SEC) pursuant to the section 14(a) of the Exchange Act on 13 September, 2011, the Parties of the Merger Deal expects the merger to be completed by the end of 2011 or early 2012.  As regards timelines, the exact dates cannot be predicted as the closing of Merger Deal is dependent upon hosts of factor including absence of any order issued by courts against the transaction, affirmative votes of the majority shareholders of Motorola, Anti-trust approvals (national and international) etc., however, based on the Proxy Statement and the Merger Agreement (assuming all the closing requirements are fully met) following may be the timeline involved in the Merger Deal [from start (approaching of Google) to finish (consummation of all the legal requirements under the applicable laws)]:-

Procedure involved under DGCL, HSR Act and Exchange Act for the Merger Deal to go through

• Under section 251 of the DGCL, for a corporation to be acquired in a merger, the transaction first must be approved by the board and thereafter approved by the stock holders.  In a publically traded corporation, there typically will be a time lag on no less than 30-60 days from the date of the board action until the date of the stock holder vote.  In the present Merger Deal, after considering the proposed Terms of the Merger Agreement, the board unanimously on 14-15 August, 2011 determined that the transaction contemplated under the Merger Agreement are advisable and fair to, and in the best interest of the shareholders of Motorola.

• Further, those shareholders who do not vote in favor of the Merger Agreement and the merger will have the right to seek appraisal (under section 262 of the DGCL) of the fair value of their shares of Motorola common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they submit a written demand for such an appraisal prior to the vote on the Merger Agreement and the merger and comply with the other DGCL procedures.

• Under the provisions of the HSR Act and the rules and regulations promulgated thereunder by the Federal Trade Commission (FTC), the merger may not be completed until notification and report forms have been filed with the Antitrust Division of the United States Department of Justice (Antitrust Division) and the FTC by each of Motorola and Google, and the applicable waiting period has expired or been terminated.  Under the Terms of the Merger Agreement, Motorola and Google filed their respective notification and report forms with the Antitrust Division and the FTC under the HSR Act on 29 August, 2011.  The waiting period under the HSR Act, therefore, will expire at 11:59 p.m., New York City time, on 28 September, 2011 unless earlier terminated or extended by a request for additional information and documentary material, which we refer to herein as a “second request.”
• If within the 30-day waiting period the Antitrust Division or the FTC were to issue a second request (which in the present Merger Deal was made on 28 September, 2011), the waiting period under the HSR Act would be extended until 30 days following the date on which both Google and Motorola certify substantial compliance with the second request, unless the Antitrust Division or the FTC terminates the additional waiting period before its expiration.  Google, RB98 and Motorola have agreed to use reasonable best efforts to certify compliance with any “second request” within four months after its receipt and to produce documents as required on a rolling basis. If the Antitrust Division or the FTC believes the merger would violate the U.S. federal antitrust laws by substantially lessening competition in any line of commerce affecting U.S. consumers, it has the authority to challenge the transaction by seeking a federal court order to enjoin the merger. U.S. state attorneys general or private parties could also bring legal action.  Further, Google and Motorola plan to submit filings in other jurisdictions as necessary in due course. On 29 August, 2011, Motorola and Google agreed that, in addition to those in the United States and European Commission, pre-closing antitrust clearances in Canada, China, Israel, Russia, Taiwan and Turkey are required and applicable to the merger. Foreign antitrust authorities in these or other jurisdictions may take action under the antitrust laws of their jurisdictions, which could include seeking to enjoin the completion of the merger.

•  With respect to antitrust clearances, each of Motorola, Google and RB98 has agreed to:  

• use its reasonable best efforts to obtain termination or expiration of any waiting periods under the HSR Act, clearance under the EC Merger Regulation and such other approvals, consents and clearances as may be necessary, proper or advisable to effectuate the merger under the antitrust laws and to remove any court or regulatory orders under the antitrust laws impeding the ability to consummate the merger by the outside date; and

• use reasonable best efforts to certify compliance with any “second request” for additional information or documentary material from the Department of Justice or the FTC pursuant to the HSR Act within four months after receipt of such second request and to produce documents as required on a rolling basis.

• Google will have the unilateral right to determine whether or not the parties will litigate with any governmental entities to oppose any enforcement action or remove any court or regulatory orders impeding the ability to consummate the merger. Google will also control and lead all communications and strategy relating to the antitrust laws and litigation matters relating to the antitrust laws, subject to good faith consultations with Motorola and the inclusion of Motorola at meetings with governmental entities with respect to any discussion related to the merger under the antitrust laws.

• Securities laws in US are based on disclosure for regulating the public listed companies, if any material information comes up the board is required to promptly disclose it to the stock exchanges.  Pursuant to this, (a) under section 14(a) of the Exchange Act, Motorola filed Proxy Statement in the specified format with the SEC; (b) Motorola is obligated to file current report in Form 8-K as prescribed under the Exchange Rate

Business strategy behind the Merger Deal

Apart from the text-book explanations of the Merger Deal, in my view the main driving forces behind the present Merger Deal are:

• Mr. Carl C. Icahn (through its various US and Cayman Island based funds) have 11.39% equity shares in the Target and he wanted liquidate his shareholdings; and

•  Dr. Sanjay Jha, CEO of the Target, has about 1.84% equity shares of the Target and he also wanted to liquidate his shareholdings and perhaps, Google happens to be the only Acquirer who have agreed on the ‘Golden Parachute’ clause under the Merger Deal and additionally, Dr. Jha along with other officers of the Target would be beneficiary of cash severance payment, bonus payment, LRIP replacements, perquisites etc.

In my view, the shareholders of the Target may bring derivative suits or class action suits against the directors and officers of the Target for approving the Merger Agreement, as these directors and officers have failed in their fiduciary duties and instead to running the company steadily, they have chosen to sell the Target to an outside raider.

As per the Proxy Statement filed with the SEC, among other things, board of Motorola has cited following reasons for approving the proposed merger:

•  Terms of the Agreement are more favorable to Motorola Stockholders, like per share consideration payable (which is in full cash);
• There is a risk that Motorola’s performance may not meet market expectations, which could adversely impact Motorola’s trading range/ internal forecasts;
• If Google does not use its reasonable best efforts to complete the deal, it would be liable for $2.5 billion termination fee;
• Motorola may face certain risks related to (i) intellectual property litigation and claims; and (ii) intellectual property infringement claims; and
• Opinion of Qatalyst Partners LP and Centerview Partners LLC was tilted towards approval of the Merger Deal.

Salient feature of the Merger Agreement signed between the Parties

The Merger Agreement and plan of merger was signed among the Parties on 15 August, 2011.  Among other things, some of the important features of the Merger Agreement are as follows:

Conversion of shares clause: Typically, in a merger agreement such as the present Merger Deal, at effective time (generally a time after all closing conditions are met), all the outstanding shares of some par value (it could be any number) shall no longer be outstanding and shall cease to exist, and each holder of such shares shall cease to have any rights with respect to shares, except the right to receive the merger consideration (which is $40 in the present case).

Requisite stockholder approval clause: In terms of section 251, DGCL, the stockholders of Motorola are required to adopt the Merger Agreement and approve the merger by affirmative vote of the holders of not less than a majority of the outstanding shares in favor of the merger.

No Solicitation; Company Recommendation clause: Motorola shall and shall cause each of its subsidiaries to, and shall instruct each of its and their respective directors, officers, employees, financial advisors, legal counsels, auditors, accountant or other agents to, immediately cease any solicitation, knowing encouragement, discussions or negotiations with any persons that may be ongoing with respect to any acquisition proposal and immediately instruct any person (including that person’s representatives) that has confidential information about Motorola that was furnished by or on behalf of Motorola in connection with any actual or potential acquisition proposal to return or destroy all such information. In addition, Motorola has agreed that neither it nor its subsidiaries will, nor will they authorize or knowingly permit their representatives to, directly or indirectly:

• solicit, initiate, propose or induce the making, submission or announcement of, or knowingly encourage or assist, an acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in connection with any acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in response to any other proposal or inquiry for a potential transaction that on its face is one of the specified transactions;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola Mobility or any of its subsidiaries in connection with any acquisition proposal;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola or any of its subsidiaries in response to any other proposal or inquiry for a potential transaction;
• enter into, participate, engage in or continue or renew discussions or negotiations with any person with respect to any acquisition proposal; or
• enter into, or authorize Motorola or any of its subsidiaries to enter into, any letter of intent, agreement or understanding of any kind providing for, or deliberately intended to facilitate an acquisition transaction.

However, until Motorola stockholder approval has been obtained, if the Motorola Board of Directors receives an acquisition proposal that it determines in good faith (after consultation with its financial advisor and outside legal counsel) either constitutes a superior proposal or could reasonably be expected to result in a superior proposal (and at the time of taking the following action, the acquisition proposal continues to constitute or remains reasonably expected to result in a superior proposal), the Motorola Board of Directors may:

• participate or engage in discussions or negotiations with the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement);
• furnish to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) any non-public information relating to Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google; and/or
• afford to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) access to the business, properties, assets, books, records or other non-public information, or to the personnel, of Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google.

Reasonable Best Efforts clause: This is a standard clause, under which the parties to the merger agreement shows their willingness and uprightness to complete the transaction and perform their reasonable best effort to fulfill the requirements as contemplated under the merger agreement for e.g., anti-trust clearances, consents, approvals, registrations, furnishing of information etc.  In the Merger Agreement signed between the Parties, there is a standard reasonable best efforts clause.

Termination Fees clause: This is a relief clause, and one of party is compensated for the wrong committed by the other party.  In the instant Merger Agreement, Motorola has agreed to pay $375 million to Google under some conditions and Google has agreed to pay Motorola a fee of 4 2.5 billion if some of the specified conditions/ events occurs.  Further, if Google fails to make reasonable best efforts to effectuate merger under antitrust laws, it is liable upto the tune of $3.5 billion.

Golden Parachute Compensation (GPC) clause: GPC means compensation that may be paid or become payable to its named executive officers in connection with the merger and the agreements and understandings pursuant to which such compensation may be paid or become payable.   Under the Merger Agreement, the executive officers of Motorola will receive GPC (in the form of severance amount, Bonuses, LRIP Replacements, Equity, Perquisites, Tax Reimbursement) 

Further, following completion of the merger, Motorola Mobility common stock will be delisted from the NYSE and deregistered under the Exchange Act. As a result, Motorola Mobility will be a privately held corporation, and there will be no public market for shares of Motorola Mobility common stock.