A two-hour presentation on the role of the lawyer in the M&A team, the place of legal due diligence in the overall buyer side's due diligence process, and a review of recent Delaware M&A legal developments. I'm available to give it to your law firm, company, or group.

1. UCLA Anderson Executive Education present:
MERGERS & ACQUISITIONS:
DUE DILIGENCE AND LEGAL
ISSUES
Professor Stephen M. Bainbridge
UCLA School of Law
Thursday, April 14, 2016

2. OVERVIEW
1. Lawyer’s role in M&A teams
2. Due diligence
3. Converting legal due diligence into
shareholder value
2© S T E P H E N M . B A I N B R I D G E

3. © S T E P H E N M . B A I N B R I D G E 3
Part 1
LAWYER’S ROLE

4. SELL-SIDE
» Assisting the seller in pre-sale corporate
"housekeeping," which involves cleaning up
corporate records, developing strategies for
dealing with dissident shareholders, and
shoring up third-party contracts
» Working with the investment banker in
helping evaluate competing offers
» Assisting in the negotiation and preparation
of the letter of intent and confidentiality
agreements
» Negotiating definitive purchase agreements
with buyer's counsel
© S T E P H E N M . B A I N B R I D G E 4

5. SELL-SIDE
» A pre-sale legal audit should be
conducted in order to assess the state of
the company:
» Identify and predict the problems that will
be raised by the buyer and its counsel.
» Should include corporate housekeeping and
administrative matters, the status of the
seller's intellectual property and key contracts
(including issues regarding their assignability,
regulatory issues, and litigation.
© S T E P H E N M . B A I N B R I D G E 5

6. BUY-SIDE
» Conduct legal due diligence
» Assisting in the negotiation and
preparation of the letter of intent and
confidentiality agreements
» Negotiating definitive purchase
agreements with seller’s counsel
» Working with the buyer in connection
with post-closing matters
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7. WHAT NON-LEGAL ISSUES SHOULD
MY COUNSEL RAISE WITH ME?
» What happens if XYZ happens?
» Loss of key customers
» Loss of key suppliers
» Loss of key employees (including the
seller)
» Litigation
» What happens if XYZ does not happen?
» Approval of the transaction
» Approval needed for the business

8. WHAT NON-LEGAL ISSUES SHOULD
MY COUNSEL RAISE WITH ME?
» Rep and warranty insurance
» Insurance impact
» Employment agreements/policies
» Benefit plans

9. WHAT NON-LEGAL ISSUES SHOULD
MY COUNSEL RAISE WITH ME?
» IT
» How does this effect your loan
covenants?
» SEC reporting requirements?
» Third party shareholder representative
» Escrow provider

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Part 2
DUE DILIGENCE

11. FORMS OF DUE DILIGENCE
© S T E P H E N M . B A I N B R I D G E 1 1

12. WHY LEGAL DUE DILIGENCE?
» Helps buyer
understand target
better.
» May aid in target
valuation by
identifying risks
associated with
lawsuits, insurance
policies, employee
benefit and labor
arrangements,
potential
environmental claims,
intellectual property,
etc…
» Assists counsel in
drafting acquisition
documents,
especially legal
representations and
warranties,
covenants, and
conditions.
© S T E P H E N M . B A I N B R I D G E 1 2

13. SCOPE CONSIDERATIONS
» Deal structure.
» Industry.
» Global presence.
» Competition.
» Access to target company: The
target company often restricts
access to the management of the
business to only those necessary
to facilitate the due diligence
review to limit interference and
preserve the confidentiality of the
merger discussions.
» Cost: The buyer can limit the
scope of the due diligence
investigation to reduce its
expenses. Sometimes, a buyer
conducts its investigation in
stages and only increases
spending when the likelihood of
consummation increases.
» Time constraints: It is usually in
both parties' interest to quickly
conclude the review and execute
the definitive merger agreement.
© S T E P H E N M . B A I N B R I D G E 1 3

14. THE DATA ROOM
» Target will provide access to key documents in
a data room; increasingly, located in the cloud.
» Organizational documents
» All material contracts
» All documents relating to pending litigation and
litigation recently completed
» Major documents relating to labor and employee
benefits matters
» Tax filings.
» Takeover defenses.
» Press releases.
» SEC filings.
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15. PERSONNEL INTERVIEWS
» Identify the right people to be
interviewed:
Rights and PermissionsContracts Department
MIS/Technology Officer
Senior Executives
Inside & Outside
Counsel
Charged with web site
development/sales/subscriptions?
CFO (liens, security interest)
Licensing
Litigation
Company Policy
People

16. ORGANIC DOCUMENTS
» Ensure that all organic documents are
available and free of concerns, including:
» Certificate of incorporation, good standing
certificates, bylaws, minutes of
shareholder and director meetings,
shareholder agreements, and any
outstanding warrants and option
agreements.
© S T E P H E N M . B A I N B R I D G E 1 6

17. MAJOR CONTRACTS
» Review all major distributor, supplier and
customer agreements, all confidentiality
and non-compete agreements, all
intellectual property agreements
(licenses into and out of the company),
and all equipment leases.
» Is a change of control an event of default
in any?
© S T E P H E N M . B A I N B R I D G E 1 7

18. REAL ESTATE
» Review all real estate leases entered into by
the target company (whether as a tenant or
a landlord), purchase agreements, surveys
(if a long term lease or fee owned), title
insurance policies (if fee owned).
» Ascertain whether any consents are needed
for the contemplated business sale (or
merger) transaction, how much the rent
liabilities are, whether there are sufficient
term(s) remaining on the lease(s).
© S T E P H E N M . B A I N B R I D G E 1 8

19. CAPITAL STRUCTURE/FINANCING
» Is all outstanding stock fully paid and
non-assessable?
» Is the company in compliance with all
bond indentures?
» Review all UCC liens for defaults or other
concerns.
» Is company current on SEC filings?
» SOX compliance
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20. TECHNOLOGY/IP
» Identify target’s IP
» Domestic and foreign patents (and
patents pending)
» Registered and common law trademarks
and service marks
» Copyrighted products and materials
» Trade Secrets
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21. TECHNOLOGY/IP
» Legal assessment:
» Has the company taken appropriate steps to protect
its intellectual property (including confidentiality and
invention assignment agreements with current and
former employees and consultants)?
» Is the company infringing on (or has the company
infringed on) the intellectual property rights of any
third party, and are any third parties infringing on (or
have third parties infringed on) the company’s
intellectual property rights?
» Is the company involved in any intellectual property
litigation or other disputes (patent litigation can be
very expensive), or received any offers to license or
demand letters from third parties?
» What indemnities has the company provided to (or
obtained from) third parties with respect to possible
intellectual property disputes or problems?
© S T E P H E N M . B A I N B R I D G E 2 1

22. DUE DILIGENCE PROCESS
OVERVIEW
A- Preparation:
Research,
understand,
value and help
the company
avoid or
minimize risks
B- Focus: (1)-
contingent
liabilities (2)-
material
contracts of the
target (3)-
employee (4)-
restrictions on
the conduct of
target business
C-Data
Collection:
-gathering
data,
-interviews
D-Assessing
Data (1)-
Check all
relevant
regulatory
filings
documents,
(2)-Check
press reports,
(3)-Check
company and
affiliates
websites, (4)-
talk or
interview
former
employee,
directors,…
(5) watch
everything
about the
company
E-Data
Analysis
techniques:
coding,
identify
pattern for
comparisons
purpose,
codes can be
based on:
themes,
ideas,
concepts,
terms,
phrases or
keywords
F-Data
Reporting:
very well
written,
organized and
detailed
documents:
memo style,
working
paper style,
book style,
news articles
style or
teaching
materials
style.
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Part 3
CONVERT ING LEGAL DUE DILIGENC E
INTO SHAREHOLDER VALUE

24. THE IMPERATIVE
» “In a universe where litigation
resulting from public company
mergers is ubiquitous, it is likely that
the Board's awareness of its fiduciary
duties would have provided substantial
leverage on the Special Committee and
the Board to pursue the opportunities
that the market … provided”
» In re Quest Software Inc. Shareholders
Litig., No. CV 7357-VCG, 2013 WL
5978900, at *8 (Del. Ch. Nov. 12, 2013)
© S T E P H E N M . B A I N B R I D G E 2 4

25. THE IMPERATIVE
» “Shareholder litigation challenging corporate
mergers is ubiquitous, with the likelihood of
a shareholder suit exceeding 90%.”
» Most settled, with many involving
shareholders getting only additional
disclosures and plaintiff lawyers getting
fees.
» Jill E. Fisch et. al., Confronting the
Peppercorn Settlement in Merger Litigation:
An Empirical Analysis and A Proposal for
Reform, 93 Tex. L. Rev. 557 (2015)
© S T E P H E N M . B A I N B R I D G E 2 5

26. DIGRESSION ON TRULIA
» In re Trulia Inc. Stockholder Litig., C.A.
No. 10020-CB (Del. Ch. Jan. 22, 2016):
» Disclosure-only settlements generally not
fair or reasonable
» The additional disclosures must be “plainly
material”
» Approved settlements will only release
Delaware fiduciary duty claims, not all claims
© S T E P H E N M . B A I N B R I D G E 2 6

27. DIGRESSION ON TRULIA
» Likely effects:
» More extensive books and records
requests (DGCL § 220)
» Filing suits in other jurisdictions
» Consider exclusive forum bylaws or charter
provisions per DGCL § 115
» More Delaware filed cases will go to trial
» But (maybe) fewer cases will be filed
© S T E P H E N M . B A I N B R I D G E 2 7

28. Standards of Review
Chen v. Howard Anderson (Del. 2014)
BJR
BoD were disinterested and
independent
E.g., Arms-length mergers with
no deal protection devices
Enhanced Scrutiny
BoD faced “potential conflicts of interest because of the decisional
dynamics present in particular recurring and recognizable situation”
E.g., Takeover defenses, sales of control, deal protection devices
Unocal
{Blasius)
Revlon
Fairness
BOD confronted actual conflicts
of interest such that the
directors making the decision did
not comprise a disinterested and
independent board majority
E.g., Freeze-outs and other COI
transactions

29. CURRENT ISSUES
1. Becoming informed before a sale
2. Appraisal valuation
3. Controlling shareholder liability
4. Financial advisor conflicts of interest
© S T E P H E N M . B A I N B R I D G E 2 9

30. BOARD OBLIGATION TO BE
INFORMED
» “The business judgment rule “is a
presumption that in making a business
decision, the directors of a corporation acted
on an informed basis, in good faith and in the
honest belief that the action taken was in the
best interests of the company.’” -- Smith v. Van
Gorkom (Del. 1985).
© S T E P H E N M . B A I N B R I D G E 3 0

31. BOARD OBLIGATION TO BE
INFORMED
» “The business judgment rule “is a
presumption that in making a business
decision, the directors of a corporation acted
on an informed basis, in good faith and in the
honest belief that the action taken was in the
best interests of the company.’” -- Smith v. Van
Gorkom (Del. 1985).
© S T E P H E N M . B A I N B R I D G E 3 1

32. BOARD OBLIGATION TO BE
INFORMED
» “… where the directors … make an
uninformed business judgment under
circumstances constituting gross negligence,
that decision would not be protected under
the business judgment rule and may give
rise to an actionable claim.” -- Lewis v.
Honeywell, Inc. (Del. Ch. 1987).
© S T E P H E N M . B A I N B R I D G E 3 2

33. LAWYER’S ROLE
» Leo Herzel & Leo Katz, Smith v. Van Gorkom: The
Business of Judging Business Judgment, 41 Bus.
Law. 1187, 1191 (1986)
» Van Gorkom resulted in “greater formalism on the
part of the board, as it goes about the business of
cultivating an aura of care, diligence, thoroughness,
and circumspection,” and this meant “more reliance
on and more fees for lawyers, investment bankers,
accountants,” and other advisors.
» Attorneys explain the Van Gorkom decision itself and its
interpretation of “due care.”
» Attorneys provide counsel to corporate directors and
officers in the construction and maintenance of an
acceptable takeover process.
» Due diligence and output memo/board briefing key
elements
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34. MARKET TEST
Revlon TriggeredRevlon Not Triggered
Duty of Care (duty to be
fully informed)
Duty of Loyalty (duty of
good faith)
Duty of Complete
Disclosure (Delaware)
Generally, Business
Judgment Rule Review
General Fiduciary Duties
(Care, Loyalty, Disclosure)
Duty to seek “the highest
value reasonably
obtainable for
stockholders”
Enhanced Scrutiny
Duty to “act in a
fully informed
manner, and in
good faith, to
obtain the best
deal available”
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35. THE BORDERS OF REVLON-LAND
» Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d
1270 (Del. 1994) :
» The directors of a corporation “have the obligation of
acting reasonably to seek the transaction offering the
best value reasonably available to the stockholders,”
in at least the following three scenarios:
» “when a corporation initiates an active bidding process
seeking to sell itself or to effect a business reorganization
involving a clear break-up of the company”;
» “where, in response to a bidder’s offer, a target abandons
its long-term strategy and seeks an alternative transaction
involving the break-up of the company”; or
» when approval of a transaction results in a “sale or change
of control.” In the latter situation, there is no “sale or
change in control” when “‘[c]ontrol of both [companies]
remain[s] in a large, fluid, changeable and changing
market.’”
3 5

36. CHANCERY THINKS FORM OF
CONSIDERATION MATTERS
All stock
• No change of
control
• No Revlon
duties
Mixed stock (67%)
and cash (33%)
• No change of
control per
Santa Fe (Del
1995)
• No Revlon
duties
Mixed stock (50%)
and cash (50%)
• Change of
control per
Smurfit-Stone
(Del Ch 2011)
• Revlon duties
All Cash
• Change of
control per
Nymex (Del Ch
2009) dicta
• Revlon duties
3 6

37. REVLON-LAND
» “Enhanced Scrutiny” involves:
» Judicial determination regarding adequacy of
decisionmaking process (including information on which
directors based decision)
» Judicial examination of the reasonableness of the directors’
action in light of circumstances then existing
» No single “blueprint” by which a Board must fulfill its
Revlon duties. Board can successfully fulfill Revlon
through:
» Public “Auction” (publicly announced deal process)
» Private Limited “Auction” (approaching a smaller number of
bidders confidentially)
» One-on-one negotiations + market check
» If challenged, directors must be able to prove they were
adequately informed and acted reasonably
© S T E P H E N M . B A I N B R I D G E 3 7

38. GO SHOP CLAUSES
» A “go-shop” is a provision in a merger agreement
that allows a target to solicit interest from potential
buyers of the company for a limited period of time
(typically between 20-55 days) after signing a
definitive agreement with an initial buyer.
» The right to solicit includes the ability to exchange
confidential information about the target with a
potential buyer so long as the potential buyer signs a
confidentiality agreement that is substantially on the
same terms as the confidentiality agreement signed
with the initial buyer.
» Once the go-shop period ends, the target typically is
subject to the customary “no-shop” prohibitions
against soliciting other bidders or engaging in
negotiations except in response to an unsolicited offer
that could reasonably be expected to lead to a
superior transaction.
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39. IMPACT OF GO SHOP CLAUSES
» Typically used where target initially
negotiates with single bidder rather than
conducting an auction
» Provides a “market check” on price
adequacy
» More common where (1) a financial
buyer (2) uses all cash financing and (3)
the target has low valuation uncertainty
» Typically result in significant price
improvement even if no competing
bidder emerges
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40. APPRAISAL
» In public company acquisitions, the
Delaware courts have generally found that
the merger price was the most reliable
indicator of fair value.
» Growing reluctance by courts to substitute
their own calculation of the “fair value” of a
target company’s stock, including through a
discounted cash flow analysis, for the
purchase price derived through arm’s-length
negotiations, as long as that price resulted
from a thorough, informed and disinterested
sales process.
© S T E P H E N M . B A I N B R I D G E 4 0

41. MERLIN PARTNERS LP V. AUTOINFO, INC.,
NO. 8509-VCN (DEL. CH. APR. 30, 2015)
» Plaintiff expert testified shares should be
valued at $2.60/share. But court held the
$1.05 merger price was a more reliable
indicator of fair value because
1. It was the product of an adequate process,
2. The board had been considering a sale even
before the company’s larger institutional
shareholders began pressuring the board
for improved performance
3. The company was “shopped quite a bit”
4. Negotiations with the buyer were conducted
at arm’s length by an independent special
committee.
© S T E P H E N M . B A I N B R I D G E 4 1

42. IN RE APPRAISAL OF DOLE FOOD
COMPANY, INC., NOS. 8703-VCL &
9079-VCL (DEL. CH. AUG. 27, 2015)
» Court declined to defer to merger price where:
» Dole’s CEO and controlling stockholder, David
Murdock, and his “right hand man,” C. Michael
Carter, undermined the sales process by
depriving the special committee of the ability to
negotiate, and stockholders of the right to vote,
on a fully informed basis.
» Carter intentionally attempted to depress the
price of the company’s stock in advance of a
going-private proposal and interfered with the
special committee by, among other things,
providing it with false financial information and
misrepresenting that other financial information
was not available
© S T E P H E N M . B A I N B R I D G E 4 2

43. WHEN DO YOU HAVE A
CONTROLLING SHAREHOLDER?
» Calesa Associates, L.P. v. American
Capital, Ltd., C.A. No. 10557-VCG. (Del.
Ch. 2016):
» American Capital, despite owning only
26% of the company’s shares, exercised
sufficient influence over the Halt Medical
board such that it and certain affiliates
could be deemed “controlling
stockholders” owing fiduciary duties to
other stockholders.
© S T E P H E N M . B A I N B R I D G E 4 3

44. WHEN DO YOU HAVE A
CONTROLLING SHAREHOLDER?
» Calesa Associates, L.P. v. American Capital, Ltd:
» “Control” is a highly fact-specific inquiry that
focuses on the stockholder’s actual influence
over the board in regard to the transaction at
issue
» Three of Halt’s then-six directors had been
appointed by American (including one of
American’s directors and one of its executives),
and
» A fourth purportedly independent director—a
close friend of American’s chairman who co-
founded an investment firm that was among
American’s largest investors—was appointed at
American’s request.
© S T E P H E N M . B A I N B R I D G E 4 4

45. CONTROLLING SHAREHOLDER DEAL
SAFE HARBOR
» The BJR rather than fairness will be applied
when:
(1) the controller from the outset conditions the
transaction on the approval of both a special
committee and a majority of the minority
stockholders;
(2) the special committee is independent
(3) the special committee is empowered to freely
select its own advisors and to say no
definitively
(4) the special committee meets its duty of care in
negotiating a fair price
(5) the minority vote is informed
(6) the minority is not coerced
© S T E P H E N M . B A I N B R I D G E 4 5

46. THE LESSONS OF RURAL/METRO
» Delaware Supreme Court
held a financial advisor
liable for approximately
$76 million in damages
for aiding and abetting
breaches of fiduciary
duties by former directors
of Rural/Metro in
connection with the
company’s 2011 sale to a
private equity fund
» Boards need to address
current and historical
conflicts prior to
engagement
» Particularly if financial
analyses are presented
» Address them in
representations,
warranties and covenants
in engagement letters
» Boards should establish
processes to remain
informed of any current
or developing conflicts
throughout the
transaction and to
disclose them to
stockholders
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