Page 1
Structuring Carve-Out Transactions: Key Deal,
Environmental, Intellectual Property, and
Other ConsiderationsAllocating Assets and Liabilities, Due Diligence, Reps, and Warranties, Consents
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, JUNE 6, 2019
Presenting a live 90-minute webinar with interactive Q&A
Abbi L. Cohen, Partner, Dechert, Philadelphia
J. Ian Downes, Counsel, Dechert, Philadelphia
Stephen R. Pratt, Partner, Dechert, Philadelphia
Nathan Smith, Associate, Dechert, London
Page 2
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-888-450-9970 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can address
the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Page 3
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Page 4
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
Page 5
© 2019 Dechert LLP
Carve-Out Transactions
Practical Tips for Successfully Navigating the Key Pitfalls
June 6, 2019
Abbi Cohen | Ian Downes | Stephen Pratt | Nathan Smith
Page 6
|
Agenda
▪ Section 1 – Introduction
▪ Section 2 – Preparing for Sale
▪ Section 3 – Scope of Due Diligence
▪ Section 4 – Allocation of Assets & Liabilities
▪ Section 5 – Transition
▪ Section 6 – Key Transaction Documents
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 6June 6, 2019
Page 7
|
Section 1 – Introduction
Overview – What is a Carve-Out?
▪ A sale of a business or division
▪ Why carve-out a business or division?
▪ Preparation is key
• Unique, complex issues that need to be addressed
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 7June 6, 2019
Practice Point: Carve-outs are typically closed within six to
12 months of initiation of the sale process.
Page 8
|
Section 1 – Introduction (continued) Market Data
▪ Carve-Outs by Year and by Deal Value:
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 8June 6, 2019
Source: Deloitte M&A Index 2017: CREATING SHAREHOLDER VALUE THROUGH DIVESTMENTS
Page 9
|
Section 1 – Introduction (continued)
▪ Ability to Meet Expected Timeline & Budget for Carve-Outs:
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 9June 6, 2019
Source: Accenture’s 2015 STRATEGY CARVE-OUT SURVEY Practice Point: Setting realistic expectations is
key—carve-outs frequently run over budget and
past internal deadlines.
Page 10
|
Section 2 – Preparing for Sale
▪ Carve-out Transactions by Industry:
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 10June 6, 2019
Source: ABA Mergers and Acquisitions Committee's M&A CARVEOUT
TRANSACTIONS DEAL POINTS STUDY (surveying 126 transactions from 2015-2016)
Page 11
|
Section 2 – Preparing for Sale (continued)
Determining a Transaction Perimeter
▪ A seller should clearly delineate what parts of its business are “in scope” and
being sold versus “out of scope” and being retained
▪ Where is the target business operated?
• Where are assets, sales, and employees located?
• How is non-U.S. business held?
• Create jurisdiction summary charts
▪ Are there sites where sold and retained businesses will be co-located?
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 11June 6, 2019
Practice Point: Consider the touch points between the target business,
on the one hand, and the retained business, on the other hand.
Page 12
|
Section 2 – Preparing for Sale (continued)Building a Carve-Out Team
▪ Creating a strong internal and external team is key
• Responsible for sell-side diligence
• Develop a carve-out plan
• Failing to prepare is preparing to fail
▪ Sellers should carefully determine which employees to bring “under the tent” to
assist with the transaction
• Devising a communication strategy or policy with respect to employees who are
outside of the tent is recommended
• Employee loyalty may shift as deal progresses
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 12June 6, 2019
Practice Point: Engage appropriate professional services firms
early on to assist with planning, negotiation, and execution.
Page 13
|
Section 2 – Preparing for Sale (continued)Deal structure
▪ An in-depth tax analysis should be conducted to determine viability and
preferred transaction structure
• Develop a steps plan
▪ Key considerations include:
• Number of entities sold and location of entities’ assets
• Tax classification of seller
• Available tax attributes of seller
• Historical tax liabilities
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 13June 6, 2019
Page 14
|
Section 2 – Preparing for Sale (continued)Preparation of stand-alone financials
▪ Preparing separate financial statements to the satisfaction of the buyer and its
lenders is a common long lead time item
• International Financial Reporting Standards may be required for prospective non-
U.S. buyers
▪ Consider the expected buyer and financing structure
• Public M&A
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 14June 6, 2019
Question: What do you do if audited financials are not available?
Answer: Consider your potential buyer(s), and determine the
minimum amount of financial disclosure that they would need in order
to consummate the transaction. Unaudited financials/management
reports may be enough in certain situations.
Page 15
|
Section 3 – Scope of Due Diligence
▪ Contracts & Licenses
• Change of control, assignment, and other consent rights
• Acceleration of payments or vesting
• Shared contracts
• Related party agreements
▪ Assets
• Real estate & other tangible property
• Intellectual property & intangibles
• Permits, licenses and registrations
▪ Collateral to be replaced
• Letters of credit
• Guarantees
• Bonding arrangements
▪ Buyer should engage diligence team early on
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 15June 6, 2019
Practice Point:
Establishing a clearly
defined materiality
threshold can streamline
the due diligence
process.
Page 16
|
Section 4 – Allocation of Assets & Liabilities
Allocation of Assets
▪ Stock sale vs. asset sale vs. combination
▪ Important to clearly define what constitutes the business being acquired
• Sufficiency of assets representation in the purchase agreement
▪ Are assets limited to those “exclusively” used by the acquired business or is a
different standard more appropriate?
• Key diligence focus for the buyer
▪ What happens when acquired assets don’t transfer?
• Wrong pockets provisions
• “Back-to-back” arrangements
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 16June 6, 2019
Page 17
|
Section 4 – Allocation of Assets & Liabilities (continued)
Allocation of Liabilities
▪ Stock sale vs. asset sale vs. combination
• Use of indemnification to change structure
• Consider whether to allocate liabilities relating to businesses or assets no longer
owned or operated by the Business
▪ “Your watch” vs. “our watch”
• Depends on leverage
• Buyers want a clearly defined set of liabilities
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 17June 6, 2019
Page 18
|
Section 4 – Allocation of Assets & Liabilities (continued)
Allocation of Liabilities
▪ Liabilities that may transfer as a matter of law:
• Environmental (owner/operator liability)
• Products liability
• Employee matters
▪ How to protect against liabilities in the purchase agreement:
• Diligence
• Indemnity
• “Excluded” liabilities
• Cooperation & privilege
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 18June 6, 2019
Page 19
|
Section 5 – Transition
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 19June 6, 2019
Shared Business Functions & Services
▪ Certain critical services may be
intertwined between the target
business and the retained business:
• IT
• Accounting
• Payroll & HR
• Benefit plans
• Insurance
• Counsel and litigation support
• Local
▪ Shared contracts
• Splitting contracts / timing
• Address consent fees
▪ Integration is key
▪ Focus on the details and cost
analysis of any transition services
Practice Point: Failing to ensure
business continuity for shared services
on day one post-close is the #1 item of
value leakage for a buyer.
Page 20
|
Section 5 – Transition (continued)Employees & Benefits
▪ Understanding the employees involved, along with their prior and future job
functions, is crucial to a successful carve-out
• Seller should initially plan who they intend to transfer vs. who they intend to retain
• Buyer can condition transaction on the retention of key employees identified prior to
signing
• Mapping employees to new organization – Pre- or post-closing layoffs?
▪ Seller may incentivize loyalty through retention and/or performance bonuses
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 20June 6, 2019
Practice Point: It is important to minimize disruption of employees’ day-to-day
operations during the negotiation and consummation of the transaction.
Page 21
|
Section 5 – Transition (continued)Employees & Benefits
▪ Transfer of Employees
• Structure of deal plays a key role
• Automatically transfer vs formal offer and acceptance
• Allocation of severance costs and other liabilities of non-transferred employees
• Required notifications and/or consents may affect timing
Unions
WARN Act
▪ Post-Closing Integration
• Strategic buyers should plan for how to fold acquired employees into their existing
compensation structure and benefit plans
• Purchase agreement may provide for a continuation of a certain level of benefits for
transferred employees
• Benefit plan transfer/integration
• Employment agreements/restrictive covenants
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 21June 6, 2019
Page 22
|
Section 5 – Transition (continued)Transfer of Union Employees
▪ Union-related obligations depend on the form of transaction
• Stock sale – CBAs and bargaining obligations are unaffected
• Asset sale
CBAs do not automatically transfer, but agreements may require seller to condition sale on assumption
Successorship principles typically require recognition of unions and bargaining
▪ Effects bargaining
• Seller must bargain concerning the “effects” of the sale
• Typical subjects include severance, transfers within seller’s organization, pension and retiree
benefits
• Notice and opportunity required in advance of closing
• Duty is to bargain in good faith, not to agree to any specific terms
▪ Multiemployer pension plans
• An asset sale can trigger a seller’s withdrawal from union multiemployer pension plans
• Liability even if employees are hired by buyer
• ERISA § 4204 allows for avoidance of withdrawal liability if certain conditions are met
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 22June 6, 2019
Page 23
|
Environmental
▪ Due Diligence
• Sell-side Phase I’s and Limited Environmental Compliance Reviews can streamline
due diligence process and minimize disruption of multiple bidder site visits
• For regulated industry sectors, high level review of permit transfer/reissuance
process and timing should be part of preliminary due diligence
Sellers should expect that sell-side employees will need to prepare technical permit
transfer/reissuance applications
• Environmental transfer acts, like NJ ISRA or CT Transfer Act, can be gating issues
• Buyers should consider whether financial assurance obligations will be triggered or
need to be maintained post-closing
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 23June 6, 2019
Page 24
|
Environmental (continued)
▪ Managing Post-Closing Environmental Liabilities
• Consider whether existing environmental insurance, third party indemnity or
guarantees will be available to buyer post-closing
Unusual for seller’s environmental insurance to be assignable to buyer
• Splitting shared facilities post-closing can be challenging environmentally
Consider cost, timing and who controls
▪ Post-Closing Integration
• Will key EHS personnel remain with seller?
If so, consider how to replace the functions, maintain institutional knowledge
• Will the acquired business change the buyer’s environmental/regulatory profile?
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 24June 6, 2019
Page 25
|
Section 5 – Transition (continued)Intellectual Property & Information Technology
▪ Legal ownership of IP used by the acquired business may be difficult to
disentangle:
• Software used by the acquired business’ employees often licensed at the seller-
entity level and will need to be renegotiated separately
• Buyer may want to enter into licensing or joint ownership arrangements with the
seller to permit the acquired business to continue using seller IP
▪ Carved-out business might have limited or no backoffice IT, so planning for
replacement is a key workstream
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 25June 6, 2019
Page 26
|
Intellectual Property
▪ Common Due Diligence Matters and Initial Considerations
• IP Ownership
• Scoping IT Assets
Data Considerations
• Software and Other IP Licenses
Shared?
Split?
• Consent Issues
Review Structure
2-Step Transaction
• Internal Reorganization? Contribution?
• Sale to Third Party
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 26June 6, 2019
Page 27
|
Intellectual Property (continued)
▪ Common Due Diligence Matters and Initial Considerations (cont’d)
• Review of IP Portfolio
Territorial Review
Patent Family
Double Patenting and Terminal Disclaimer Issues
• Branding Issues
Short-term
• Sell-off existing Inventory
• Marketing Materials
Long-term
• Co-existence
• Re-branding
• License
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 27June 6, 2019
Page 28
|
Intellectual Property (continued)
▪ Key IP-Related Documents
• IP Assignments
• Cross-License Agreement
• Transition Services Agreements
▪ Negotiation and Drafting Tips
• Balancing interests of Seller and Buyer
• Role of Diligence and Understanding the Business
• Importance of Schedules
• Licenses - Focus on Scope and Field of Use
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 28June 6, 2019
Page 29
|
Section 6 – Key Transaction Documents
▪ Purchase agreement
▪ Transition services agreement
▪ Escrow agreement
▪ Assignment agreements
▪ Arrangements for licensing or joint ownership of IP
▪ Subleases of leased real property
▪ Consents
• Regulatory
• Contractual
• Stockholder approval (public M&A)
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 29June 6, 2019
Page 30
|
Conclusion & Questions
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls 30June 6, 2019
Page 31
|
Core Team Member
31June 6, 2019
Partner, Philadelphia
Abbi L. Cohen
[email protected]
+ 1 215 994 2352
Abbi L. Cohen, recognized as a leading environmental lawyer by Chambers USA
for more than a decade, focuses her practice on evaluating environmental liabilities
associated with corporate, real estate, and financing transactions—including with respect
to energy—and providing both state and federal permitting and regulatory compliance
advice. She has assisted clients in siting and permitting industrial facilities, including
resource recovery and cogeneration facilities, as well as power plants.
Ms. Cohen has provided environmental advice with respect to more than a thousand
business transactions. She has assisted one of the leading U.S. rating agencies in
developing environmental assessment and insurance criteria and in evaluating the
potential impact of environmental conditions on mortgage-backed securities in numerous
transactions involving portfolios consisting of multiple properties. She has also advised
clients on structuring transactions to minimize environmental liabilities, negotiating
strategies, and in preparing relevant provisions in transaction documents in connection
with acquisitions, divestitures, and financings. She has participated in supervising
environmental consultants throughout North America, South America, Europe, and Asia.
Awards/Recognition
Ms. Cohen has been consistently recognized by
Chambers USA, the International Who’s Who of
Environmental Lawyers and Best Lawyers in
America as a leading environmental lawyer. In
recent editions of Chambers, Ms. Cohen was
identified as a “real subject matter expert” that is
“very client-oriented and very commercial” with one
client praising how “she combines intellect, legal
knowledge and a deal-oriented demeanor.”
Bar Admissions/Qualification
Pennsylvania
Education
Barnard College, Columbia University, B.A., 1980,
magna cum laude, with High Honors in economics,
Phi Beta Kappa
University of Pennsylvania Law School, J.D., 1983
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls
Speaker
Page 32
|
Core Team Member
32June 6, 2019
Counsel, Philadelphia
J. Ian Downes
[email protected]
+1 215 994 2346
J. Ian Downes practices in the area of labor and employment law, with a focus on ERISA
litigation and labor-management relations. He has significant experience with ERISA
class actions, including so-called “stock drop” cases, as well as in representing clients in
all types of labor and employment litigation.
Mr. Downes devotes a significant portion of his practice to providing clients with day-to-
day assistance and counseling concerning all varieties of labor and employment issues,
including negotiation and drafting of employment agreements and restrictive covenants,
planning and implementing reductions in force and complying with the Worker Adjustment
and Retraining Notification (WARN) Act and state and local plant closing laws, and
handling of employee complaints and discipline issues. Dechert’s Corporate and
Securities teams frequently call upon Mr. Downes to assist with labor issues arising in
connection with corporate transactions, particularly those involving unionized workforces.
United States District Court for the District of New
Jersey, Honorable Joseph E. Irenas
Bar Admissions/Qualifications
Education
Harvard Law School, J.D., 2001
Amherst College, B.A., 1997
Memberships
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls
Clerkships
Pennsylvania
New Jersey
United States Court of Appeals for the Third Circuit
United States District Court for the District of New
Jersey
United States District Court for the Eastern District
of Pennsylvania
American Bar Association, Section of Labor and
Employment Law
Philadelphia Bar Association
Speaker
Page 33
|
Core Team Member
33June 6, 2019
Partner, Philadelphia
Stephen R. Pratt
[email protected]
+1 215 994 2296
Stephen R. Pratt focuses his practice on mergers and acquisitions, with an emphasis on
private equity and public company M&A, as well as securities offerings and general
corporate matters, including corporate governance matters and public company reporting
and disclosure issues.
Mr. Pratt has advised strategic buyers and sellers, private equity sponsors, special
committees and financial advisors on merger and acquisition transactions, with
representations in a wide range of industries including banking, financial services,
manufacturing, biotechnology, real estate, telecommunications, aviation, gaming and
medical devices.
He also regularly advises alternative asset managers on fund formation and regulatory
and operational issues involving business development companies and other permanent
capital vehicles, including issues concerning joint ventures and other strategic
transactions.
Bar Admissions/Qualifications
Pennsylvania New York
Education
Boston College, B.S., 2005
University of Pennsylvania Law School, J.D., 2010,
cum laude, Articles Editor for the University of
Pennsylvania Journal of Business Law
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls
Core Team Member
Memberships
Philadelphia Bar Association
Awards/Recognition
In 2018, Mr. Pratt was selected as an “Acritas
Stars” nominee.
Speaker
Page 34
|
Core Team Member
34June 6, 2019
Associate, London
Nathan Smith
[email protected]
+44 20 7184 7813
Nathan Smith focuses his practice on all matters relating to intellectual property,
particularly intellectual property litigation. Mr. Smith’s practice ranges from brand
protection and enforcement to advising on the international expansion and development
of intellectual property portfolios with particular emphasis on the fashion, retail, telecoms,
leisure and beauty sectors. Mr. Smith also regularly advises on copyright and design
infringement with a focus on the fashion industry.
Mr. Smith regularly contributes articles to intellectual property related publications and
has recently spoken at seminars on the Protection of Trade Mark Rights within the
Financial Services Industry and the Protection and Enforcement of Design Rights in the
Fashion Industry.
Awards/Recognition
In the 2017 edition of The Legal 500 UK, Mr. Smith
is noted for his work in intellectual property, with his
practice recognised as going "from strength to
strength."
Bar Admissions/Qualifications
England and Wales
Education
International Trade Mark Association
Memberships
Carve-Out Transactions - Practical Tips for Successfully Navigating the Key Pitfalls
University of Bristol, Post-graduate Diploma,
Intellectual Property Law
University of Sheffield, Law
Speaker
Page 35
For further information, visit our website at dechert.com.Dechert practices as a limited liability partnership or limited liability company other than in Dublin and Hong Kong.