2012 M&A Deal Terms Study

2012 SRS M&A Deal Terms Study
An analysis of deal terms and post-closing experience in private-target M&A transactions

For more information, please contact SRS at dts@shareholderrep.com

2012 SRS M&A Deal Representative Services LLC. All© 2012 Shareholder Representative Services LLC. All rights reserved.
© 2012 Shareholder Terms Study rights reserved. | 1
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About SRS | Shareholder Representative Services
A closed deal is not a done deal. Anything can happen after closing. A great variety of issues, often unpredicted, arise
over the months and years following the sale. SRS has accumulated years of experience through hundreds of deals. When the
stakes are high, shareholders require the most experienced post-closing team.

You worked hard to close the deal. Make sure you have the right representative to see it through.

The SRS Difference:

§  Better escrow economics through Acquiom™
Acquiom provides a completely re-engineered M&A escrow, investment and payments service, which provides a superior
client experience while reducing transaction expenses.

§  M&A analytics to drive better deals
SRS has the most extensive database of M&A deal-terms and post-closing claims from private company sales ever
assembled.

§  Unmatched dispute resolution and litigation management
SRS is the only firm with post-closing expertise based on the successful resolution of hundreds of claims and the
completion of final escrow releases and earn-out milestone payments.

§  Post-closing escrow management, client support, online access, and monthly reporting
SRS offers superior client service by anticipating questions and issues that could arise and delivering information online
24/7.

SRS also offers SRS MAX™ for customized deal analytics, and SRS EscrowExchange™ for early escrow liquidity.

For more information visit: www.shareholderrep.com

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. About SRS | 2
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About this Study

§  The Deal Terms Study Sample
The 2012 SRS Deal Terms Study analyzes 342 private-target acquisitions on which SRS served as the shareholder
representative from the start of 2009 through the end of Q3 2012 (the 2011 Study analyzed deals from the start of 2008
through the end of Q3 2011). As used herein, “2012 deals” includes deals closing through the end of Q3 in the 2012
calendar year. Note that data points on past years may differ slightly from previous SRS Deal Terms Studies due to (i)
changes in presentation from study-over-study to year-over-year, (ii) deals added in Q4 2011 that were not reported in the
2011 Study, and (iii) reporting medians rather than averages. Sample sizes are larger for more recent years as a result of
the growth of SRS.

•  342 Acquisitions analyzed •  $55.3 Billion in stated deal value
•  Aggregate data on 200+ deal terms •  $42.7 Billion paid at closing
•  301 Mergers, 13 asset purchases and 28 stock •  $4.9 Billion held in escrow
purchases •  $7.7 Billion in defined earn-out consideration, plus
•  82 Deals with earn-outs uncapped potential payments

§  New Data in the 2012 Study
Time to exit, equity capital investment data*, termination fees, conflict waivers and more detailed analyses of carveouts to
indemnification caps and survival periods have been included for the first time in the 2012 Study.

§  Why Our Study is Unique
As shareholder representative, SRS has access to seller management, shareholders, and all deal documents, and manages
all post-closing matters. Most information from these sources is not publicly available or reported in other studies. Our
goal is to arm deal professionals who negotiate and advise on private-target transactions with robust, reliable sources of
information that can’t be found elsewhere.

* Throughout this study, we rely primarily upon S&P Capital IQ™ for equity capital investment data.

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Overview | 3

Table of Contents
§  Overview...............................................................................5 •  Legal Opinions (Non-Tax)...............................................49
•  Key Findings....................................................................5 •  Appraisal Rights............................................................50
•  Seller Industries..............................................................6 §  Indemnification.....................................................52
•  Transaction Values..........................................................7 •  Stand-Alone Indemnities................................................53
•  Years to Exit...................................................................8 •  “Sandbagging”..............................................................54
•  Transaction Values as Multiples of Return on Equity •  Survival/Time to Assert Claims......................................55
Capital Invested...............................................................9 •  Types of Losses Covered................................................59
•  Closing Consideration Trends.........................................10 •  Baskets.........................................................................60
•  Sellers’ Financings and Earnings...................................11 •  Materiality Scrape.........................................................67
§  Financial Provisions............................................................13 •  Caps.............................................................................68
•  Post-Closing Purchase Price Adjustments......................14 •  Reductions Against Buyer’s Indemnification Claims........72
•  Earn-outs (Non-Life Sciences)........................................19 •  Indemnification as Exclusive Remedy…..........................73
•  Management Carveouts.................................................23 •  Escrows/Holdbacks.......................................................74
•  Treatment of Options (Non-Life Sciences)......................24 •  Special Escrows............................................................77
§  Pervasive Qualifiers............................................................25 §  Dispute Resolution.............................................................78
•  Definition of Material Adverse Effect..............................26 •  Waiver of Jury................................................................79
•  Knowledge Standards....................................................31 •  Alternative Dispute Resolution.......................................80
§  Seller’s Representations, Warranties, and Covenants..........32 §  Termination Fees................................................................82
•  “No Undisclosed Liabilities” Representation...................33 §  Glossary.............................................................................84
•  “Compliance with Laws” Representation........................34
•  “10b-5” and “Full Disclosure” Representations...............35
•  “No Other Representations” and “Non-Reliance” Reps....37
•  Covenants.....................................................................38
§  Closing Conditions..............................................................42
•  Accuracy of Seller’s Representations..............................43
•  “Material Adverse Change” Condition.............................47
•  No Legal Proceedings Challenging the Transaction.........48

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. TOC | 4

Key Findings

§  Deal sizes: although the median deal size* rose slightly to $75 million in 2012 from $70 million in
2011, deals $50 million or less grew to 42% of deals in 2012, up from 33% in 2011.

§  Seller financial performance: acquisitions remain heavily weighted toward Sellers with revenue, and
Sellers in the aggregate continue to show improved earnings since 2009. Coupled with a slight
increase in Seller-favorable terms generally, data suggests that some degree of market leverage is
returning to Sellers that have survived the downturn even as M&A activity remains deliberate.

§  Cash vs. stock deals: cash is still king in M&A as long-term interest rates decline.

§  Earn-outs: usage of financial metrics (revenue and earnings) and multi-metric achievement tests is
declining, accompanied by a shift toward longer earn-out periods.

§  Indemnification trends: median R&W survival periods and escrow sizes have leveled off at 18 months
and 10–12% of transaction values, respectively, since 2009. Other terms are increasingly Seller-
favorable, for example, an increase in available offsets against Buyer indemnification claim amounts
and requiring that claims exceed a minimum threshold.

§  Alternative dispute resolution (“ADR”): mandatory ADR such as mediation and arbitration has
steadily declined since 2010, down to 26% of deals in 2012 from 41% in 2010.

§  Post-closing expense funds: the median size as a percentage of the indemnification escrow continues
to trend upward, at 2.08% in 2012.

* Including escrowed amounts but not potential earn-out consideration.


Seller Industries
Subset: new deals since the 2011 Study

Other
Telecommunications 1%
4% Biopharmaceuticals
10%

Software
22% Business products
and services
15%

Semiconductors
Computers and
1%
peripherals
Networking equipment 5%
1% Consumer products
Medical devices and services
and equipment 3%
7% Electronics and
instrumentation
Media and 4%
entertainment Health care
6% services
Industrial 3%
IT services
and energy
13%
5%


Transaction Values*

More than $750MM
3%
>$250MM to
$750MM $25MM or less
13% 19%

>$100MM to
$250MM
20%

>$25MM to
$50MM
23%

>$50MM to $100MM
22%

* “Transaction values” as used herein includes escrowed amounts but does not include potential earn-out condisderation.


Years to Exit

Cumulative % of deal set Exits

18 100%

16

14
75%
Number of exits

12

% of deal set
10
50%
8

6
25%
4

2

0 0%
0 2 4 6 8 10 12 14 16 18 20 22 24

Years from founding to exit

Years to exit Equity financing rounds to exit Equity capital invested
Median: 7 Median: 3 Median: $28MM
Average: 9 Average: 3 Average: $36MM


Transaction Values* as Multiples of Return on Equity Capital
Invested
Subset: new deals since the 2011 Study with equity capital investment data available

30

27
Multiples of return on equity capital invested

24

21
§  If all equity capital is invested one year after
18 founding, a 3.8x return seven years after founding
15
yields a 25% IRR**.

12

9 Average return: 8.0x

6
Median return: 3.8x
3

0
Deal by deal

* Transaction values include escrowed amounts but do not include potential earn-out consideration.
** Assumes equity capital is invested en bloc, disregarding staged investments and liquidation preferences.


Closing Consideration Trends

Consideration type All-cash deals vs. long-term interest rates

All cash All stock Cash/stock combo All-cash deals Long-term Real Rate (average)

100% 2.5%
19% 12% 11% 13% 2.24%
86% 85%
84%
4% 3% 2%
84% 86% 85% 75% 2.0%
6%
75% 1.72%
75%

1.36% 1.5%

50%

1.0%

25%
0.5%

0.22%

0% 0.0%
2009 2010 2011 2012 2009 2010 2011 2012

* The Long-term Real Rate (Average) is the unweighted average of bid real yields on all outstanding TIPS with remaining maturities of
more than 10 years and is intended as a proxy for long-term real rates.


Sellers’ Financings and Earnings

Equity capital investment rounds at exit Sellers with revenue and positive EBITDA

Subset: non-life sciences deals*
Average Median
4.0 Sellers with revenue Sellers with positive EBITDA

100%
100% 98% 98% 97%
3.5
3.3 3.3
75%
3.1

3.0 3.0
3.0 3.0 3.0 50%
38%
31%
28%
2.5 19%
25%

2.0 0%
2009 2010 2011 2012 2009 2010 2011 2012

* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization and
thus without meaningful chances of having revenue or positive EBITDA at the time of sale.


Sellers’ Financings and Earnings

Median Seller EBITDA, last 12 months (non-life sciences deals*)

2009 2010 2011 2012
$0

($1,311,359)
($2,000,000)
($2,150,302)

($3,312,449)
($4,000,000)

($5,170,210)

($6,000,000)

* Excluded here because many life sciences Sellers are development-stage companies with long lead times before commercialization and
thus without meaningful chances of having revenue or positive EBITDA at the time of sale.


Financial Provisions

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. | 13

Post-Closing Purchase Price Adjustments

§  Post-closing purchase price adjustment example
“The ‘Adjustment Amount’ (which may be a positive or negative number) will be equal to the
amount determined by subtracting the Closing Working Capital from the Initial Working Capital.
If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer by
Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference
between the Closing Working Capital and the Initial Working Capital shall be paid by wire
transfer by Buyer to an account specified by Seller.”

“‘Working Capital’ as of a given date shall mean the amount calculated by subtracting the
current liabilities of Seller as of that date from the current assets of Seller as of that date. The
Working Capital of Seller as of the date of the Balance Sheet (the ‘Initial Working Capital’) shall
be deemed Two Million Dollars ($2,000,000).”

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Financial Provisions | 14

Post-Closing Purchase Price Adjustments

Adjustment provision included Adjustment metrics* (subset: includes adjustment)

100%
2012 2011

80% 71%
76% Working capital
74%
75%
37%
Cash
69% 36%

49%
50% 54% Debt
32%

9%
Other**
14%
25%
5%
Assets
8%

1%
Earnings
0% 0%
2009 2010 2011 2012

* 51% of post-closing purchase price adjustments in 2012 deals were based on more than one metric.
** Does not include post-closing adjustments for unpaid transaction expenses.


Post-Closing Purchase Price Adjustments:
Working Capital Excludes Tax-Related Items
Subset: 2012 deals with working capital adjustments

Tax-related
items excluded
from calculation
42%
§  Tax exclusion example
“‘Adjusted Working Capital’ means current assets
minus current liabilities; provided, however, that
‘Adjusted Working Capital’ excludes from current
assets all tax assets and excludes from current
liabilities all tax liabilities.”

Tax-related
items not
excluded from
calculation
58%


Methodology for Preparation of Closing Balance Sheet
Subset: deals with post-closing purchase price adjustments

2010 2011 2012

58% 58%
54%

27%

19%
16%
15% 15%
11% 10%
9%
6%

GAAP GAAP consistent with past Other* Silent
practices

* “Other” methodology most commonly used was GAAP as modified by the principles and changes set forth on a schedule.


Thresholds and Separate Escrows
Subset: 2012 deals with post-closing purchase price adjustments

Adjustment only if threshold exceeded Source of payment if buyer-favorable adjustment

Payment not from
Yes indemnity escrow
13% 5%

True-up from
Separate No separate indemnity
escrow escrow escrow
17% 83% 95%

No
87%


Earn-outs (Non-Life Sciences*)
Subset: non-life sciences deals

Earn-out included Earn-out metrics**

20% 18% 2012 2011
17%

14%
15%
60%
Revenue
12% 64%
10%

5%
2009 2010 2011 2012 20%
Earnings/EBITDA
36%
§  Earn-outs are much more common in
SRS’s life sciences deals than other types
of deals
33%
•  82% of biopharmaceutical deals Other***
•  84% of medical device deals 36%

•  14% of all other SRS deals

* For a detailed analysis of SRS’s life sciences deals, please see the 2012 SRS Life Sciences M&A Study.
** Earn-outs can include more than one metric, such as revenue and earnings.
*** Examples: unit sales, product launches, divestiture of assets.


Earn-outs (Non-Life Sciences*)
Subset: non-life sciences deals with earn-outs

Median earn-out potential as percentage of closing payment** Earn-out length*** (2012 median: 24 months)

50%
2012 2011

38% 20%
40% 1 year or less
36% 55%

33%
>1 to 2 years
30% 18%

29%
13%
>2 to 3 years
9%
20% 23%
20%
>3 to 4 years
0%
10%
13%
>4 to 5 years
18%
0%
2009 2010 2011 2012 0%
>5 years
0%

** Calculated as the sum of potential earn-out payments over the amount paid at closing (including escrowed amounts).
*** Measured by the date the latest earn-out period ends.


Earn-outs (Non-Life Sciences*):
Covenants, Acceleration and Offsets
Subset: 2012 non-life sciences deals with earn-outs

Not Not Not Silent
included included included 27%
94% 87% 53%

Express No 6%
Express Yes
67%

Included
47%

Included Included
6% 13%

Covenant to run business in Covenant to run business to Earn-out accelerates (fully or Buyer can offset indemnity
accordance with Seller's past maximize earn-out payments partially) on change in control claims against future earn-out
practices of earn-out assets** payments

** Generally subject to exceptions, such as if the subsequent buyer assumes the earn-out obligations.


Earn-outs (Non-Life Sciences*): Additional Provisions
Subset: non-life sciences deals with earn-outs

Earn-out is not a security Disclaimer of fiduciary relationship

Included Included
13% 13%

Not Not
included included
87% 87%

§  Example provision intended to ensure §  Example disclaimer of fiduciary
earn-out is not treated as a security relationship
“The right of Seller to a portion of the Earn-out “Nothing in this Agreement creates a fiduciary duty
Amount, if any, shall not be represented by a on the part of Buyer to Seller in respect of the Earn-
certificate or other instrument, shall not represent an out.”
ownership interest in Buyer or the Business and shall
not entitle Seller to any rights common to any holder
of any equity security of Buyer.”



Management Carveouts: Frequency and Size
§  A “management carveout” here is a cash payment triggered by an acquisition that guarantees
Seller’s management a portion of the deal consideration at closing when such participants would
otherwise receive little or nothing in respect of their equity ownership, usually due to liquidation
preferences. Because transaction bonuses often differ from management carveouts in size,
structure and timing of adoption, they are not included below.

Deals including a management carveout Median size as a percentage of transaction value*

50% 11.0%
10.0% 10.0%
10.0%
40%

9.0%
30% 27%

8.0% 8.6%
20% 19%
20%
7.0%

10%
6.0%

0% 5.0%
2010 2011 2012 2010 2011 2012

* Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. “Transaction
value” includes escrowed amounts but does not include potential earn-out consideration.


Treatment of Options (Non-Life Sciences*):
Contribution, Acceleration and Assumption
Subset: non-life sciences deals

Contribution and acceleration** Assumption of options by Buyer

Options contribute to escrow Options assumed Options not assumed
Full acceleration of vesting***
87% 73% 61% 72%
100%

74% 74%
75%
63%
56%

50% 56%
49%
44% 39%

25% 34% 28%
27%

13%
0%
2009 2010 2011 2012 2009 2010 2011 2012

** Excludes deals where option-holders received no consideration.
*** Excludes deals where options were assumed by the Buyer; measures acceleration of employee options only.


Pervasive Qualifiers


Definition of Material Adverse Effect:
Prospects Included
Subset: deals with MAE defined*

Declining use of “prospects”
§  Example term
Prospects included Prospects not included
“‘Material Adverse Effect’” means any
result, occurrence, fact, change, event or
75% 76% 85% 87%
effect that has a materially adverse effect
on the business, assets, liabilities,
prospects, capitalization, condition
(financial or other), or results of
operations of Seller.”

25% 24%
15% 13%

2009 2010 2011 2012

* “Material Adverse Effect” or “Material Adverse Change” was defined in 98% of deals.

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Pervasive Qualifiers | 26

Forward-Looking Language
Subset: 2012 deals with an MAE definition with forward-looking language

Forward-looking MAE details
“‘Material Adverse Effect’ means any result, Other**
occurrence, fact, change, event or effect that 17% "Could be"
19%
has, or could reasonably be expected to have,
a materially adverse effect on the business,
assets, liabilities, capitalization, condition
(financial or other), results of operations or
prospects of Seller.”

§  96% of deals had forward-looking
language*

"Would be"
64%

* Includes deals where the MAE definition did not include forward-looking language, but forward-looking language was predominantly used
in conjunction with the use of the defined term in the body of the agreement.
** Agreements in the “Other” category used a combination of “could” and “would” or some other forward-looking standard.


Definition of Material Adverse Effect: Carveouts
Subset: 2012 deals with MAE defined

Deals with carveouts
“‘Material Adverse Effect’” means any No carveouts
6%
change . . . except to the extent resulting
from (A) changes in general local, domestic,
foreign, or international economic conditions,
(B) changes affecting generally the industries
or markets in which Company operates, (C)
acts of war, sabotage or terrorism, military
actions or the escalation thereof, (D) any
changes in applicable laws or accounting
rules or principles, including changes in
GAAP, (E) any other action required by this
Agreement, or (F) the announcement of the
Transactions.”
Definition
includes
carveouts
94%


Definition of Material Adverse Effect: Carveouts
Subset: MAE definition has carveouts

Carveout frequency

2010 2011 2012

97% 96%
92% 92%
86% 87% 85%
82% 80%
80% 79% 79% 78%
77%
72% 71% 71%
70%
62% 63%
58% 59%
56%
50%

Actions Announcement Changes in Changes in law Economic Financial Industry War or
required by of deal accounting conditions market conditions terrorism
agreement standards downturn


Carveouts Qualified by Disproportionate Effect
Subset: MAE definition has carveouts

Disproportionate effect details (2012 deals)

No carveouts
“‘Material Adverse Effect’ means any qualified by
change . . . except to the extent resulting disproportionate
effect
from (A) changes in general local, domestic, 10%
foreign, or international economic conditions,
(B) changes affecting generally the industries
or markets in which Company operates, (C)
acts of war, sabotage or terrorism, military
actions or the escalation thereof, (D) any
changes in applicable laws or accounting
rules or principles, including changes in
GAAP, (E) any other action required by this
Agreement, or (F) the announcement of the
Transactions (provided that such event,
change, or action does not affect Seller in a At least one
substantially disproportionate manner).” carveout
qualified by
disproportionate
effect
90%


Knowledge Standards

Knowledge definition details (2012 deals)
Not defined Actual
4% 13%

§  Actual knowledge
Constructive
“‘Knowledge’ means the actual knowledge 83%
of the directors and officers of Seller.”
Subset: constructive
knowledge*
§  Constructive knowledge
“‘Knowledge’ means the actual knowledge Reasonable or due inquiry 82%
of the directors and officers of Seller and the
Reasonable or due inquiry of
knowledge that such directors and officers knowledgeable persons
36%
would have after due inquiry.”
Other form of reasonable or
11%
due inquiry
Role-based constructive
19%
knowledge
Other form of constructive
17%
knowledge
"Constructive knowledge" not
1%
defined (silent)

* 49% of 2012 deals include more than one constructive knowledge element, e.g., a due inquiry requirement as well as role-based deemed knowledge.


Seller’s Representations, Warranties and Covenants


“No Undisclosed Liabilities” Representation*

Party favored by definition

§  Example Buyer-favorable formulation Buyer Seller

“Seller has no liability except for liabilities reflected 22% 39% 39% 40%
or reserved against in the Balance Sheet or the
88%
Interim Balance Sheet and current liabilities incurred
61% 61% 60%
in Seller’s ordinary course of business since the date
of the Interim Balance Sheet.”

§  Example Seller-favorable formulation 2009 2010 2011 2012

“Seller has no liability of the nature required to be
disclosed in a balance sheet prepared in accordance Representation knowledge-qualified
with GAAP [or which could not reasonably be
expected to have, individually or in the aggregate, a
Material Adverse Effect], except for liabilities 4%
reflected or reserved against in the Balance Sheet or
the Interim Balance Sheet and current liabilities
incurred in Seller’s ordinary course of business since
the date of the Interim Balance Sheet.”
1%

2011 2012

* All 2012 deals included this rep.

Representations, Warranties and
Covenants

“Compliance with Laws” Representation*
§  Example representation
“To the Seller’s knowledge, the Business has been and is being conducted in compliance with all
applicable laws.”

“Compliance with laws” details (2012 deals)

81% 80%

12%
5%

Complete rep is knowledge Covers past and present Includes notice of investigation Includes notice of violation
qualified compliance

* All 2012 deals included this rep.

Covenants

“10b–5” and “Full Disclosure” Representations

§  Example “10b–5” representation Inclusion of reps (2012 deals)
“No representation or warranty or other statement
made by Seller in this Agreement, the Disclosure
Letter, any supplement to the Disclosure Letter, the
Neither rep "10b-5" rep
certificates delivered pursuant to Section 2.7(a) or 46% only*
otherwise in connection with the Contemplated 47%
Transactions contains any untrue statement or omits
to state a material fact necessary to make any of
them, in light of the circumstances in which it was
made, not misleading.”

§  Example “full disclosure” representation
“Seller does not have Knowledge of any fact that has
specific application to Seller (other than general
Both "10b-5" "Full disclosure"
economic or industry conditions) and that may
and "full rep only*
materially adversely affect the assets, business, disclosure" 1%
prospects, financial condition or results of operations reps*
of Seller that has not been set forth in this 6%
Agreement or the Disclosure Letter.”

* Does not include reps that apply only to the shareholder information statement (and not the acquisition agreement).

Covenants

“10b–5” and “Full Disclosure” Representations:
Knowledge Qualifiers
Subset: all deals since 2010

Subset: “10b–5” rep only Subset: both “10b–5” and “full disclosure” reps

Knowledge Only "full
Neither rep
qualified disclosure" rep
knowledge
19% knowledge
qualified
qualified
27%
61%

Both reps
knowledge
qualified
8%
Not
knowledge
Only "10b-5"
qualified
rep knowledge
81%
qualified
4%

Note: Two deals included “full disclosure”-only reps, and both were knowledge qualified.

Covenants

“No Other Representations” and “Non-Reliance” Reps

§  “No other representations” example Inclusion of reps (2012 deals)
“Buyer acknowledges that Seller has not
made and is not making any representations
or warranties whatsoever regarding the
subject matter of this Agreement, express or
implied, except as provided in this Article III.”
"No other
reps" only
32%
§  “Non-reliance” example Neither
“Buyer is not relying and has not relied on any 48%
representations or warranties whatsoever
regarding the subject matter of this
Agreement, express or implied, except for the
representations and warranties provided in Both "Non-
this Article III.” 19% reliance"
only
1%

Covenants

Covenants: Seller’s Duty to Notify Buyer of Pre-Closing Breaches
of Representations and Warranties
Subset: 2012 deals

Deals including a duty to notify Buyer’s indemnification rights limited for notified matters

No express Yes**
duty 5%
13%

Express
duty to
notify No
87% 95%

* Sample excludes “sign-and-close” deals.
** Such deals generally eliminate Buyer’s right to indemnification for the updated matter if Buyer chooses to waive the relevant closing
condition or does not exercise an existing or newly provided right to terminate the transaction because of the update. Includes deals
where Buyer and Seller agree to negotiate effects on indemnification rights in good faith.

Covenants

Covenants: Seller’s Duty to Notify Buyer of Breaches of
Covenants*

Seller expressly required to notify Buyer of breaches of covenants (2012 deals)

No
20%

Yes
80%


Covenants

Covenants: No-Shop/No-Talk

§  Example no-shop/no-talk
“Between the date of this Agreement and the Closing Date, Seller shall not . . . (i) solicit,
initiate, consider, encourage or accept any proposal or offer that constitutes an Acquisition
Proposal or (ii) participate in any discussion, conversation, negotiation or other communication
regarding, or furnish to any other Person any information with respect to, or otherwise cooperate
in any way, assist or participate in, facilitate or encourage the submission of, any proposal that
constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.”

§  Example fiduciary exception
“Notwithstanding the foregoing . . . the Seller Board may withhold, withdraw, amend or modify
its recommendation to the Selling Shareholders if it determines in good faith by resolution duly
adopted, after consultation with outside legal counsel, that it is required to do so in order to
comply with its fiduciary duties to the Selling Shareholders under applicable law.”

Covenants

Covenants: No-Shop/No-Talk*

Details**

Covenant includes
fiduciary exception
14%

No-shop/no-talk No-shop/no-talk No
covenant not included covenant included fiduciary
5% 95% exception
86%

** Fiduciary exception subset excludes stock-purchase deals.

Covenants

Closing Conditions*

* This section’s analyses exclude “sign-and-close” deals.


Accuracy of Seller’s Representations (Timing):
When Must They Be Accurate?

§  At signing only Accuracy: timing (2012 deals)
“Each of the representations and warranties 76%
made by Seller in this Agreement shall have
been accurate in all respects as of the date
made.”

§  At closing only
“Each of the representations and warranties
been accurate in all respects as of the
Closing Date as if made on the Closing Date.”

§  At signing and closing 24%

been accurate in all respects as of the date
made and as of the Closing Date as if made
on the Closing Date.” 0%

At signing only At closing only Both

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Closing Conditions | 43

Accuracy of Seller’s Representations (Materiality):
How Accurate Must They Be?

§  Accurate “in all respects” Accuracy: materiality (2012 deals)
“Each of the representations and warranties made by
Seller in this Agreement shall have been accurate in MAE "In all material respects" "In all respects"
all respects as of the Closing Date as if made on the
Closing Date.” 6%
8%

§  Accurate “in all material respects”
Seller in this Agreement shall have been accurate in
all material respects as of the Closing Date as if
made on the Closing Date.” 68%
72%

§  MAE qualification
Seller in this Agreement shall be accurate in all
respects as of the Closing Date as if made on the
Closing Date, except for inaccuracies of
representations or warranties the circumstances
giving rise to which, individually or in the aggregate, 26%
20%
do not have and could not reasonably be expected to
have a Material Adverse Effect.”
At signing At closing


MAE Qualifier with Capitalization Representation Carveout
Subset: 2012 deals with MAE qualifiers in the “accuracy of reps” condition

§  Example capitalization carveout Carveout applies
“The representations and warranties set forth
in Section 3.3 (Capitalization) shall be
accurate in all respects as of the Closing Date 64%
as if made on the Closing Date. Each of the 60%
other representations and warranties made by
Seller in this Agreement shall be accurate as
of the Closing Date as if made on the Closing
Date, except for inaccuracies of
representations or warranties the
circumstances giving rise to which,
individually or in the aggregate, do not have
and could not reasonably be expected to have
a Material Adverse Effect.”

At signing At closing


Materiality Scrape
Subset: 2012 deals with materiality or MAE qualifiers in the “accuracy of reps”
condition

§  Example materiality scrape 87%
85%
made by Seller in this Agreement shall be
accurate in all respects as of the Closing Date
as if made on the Closing Date, except for
inaccuracies of representations or warranties
the circumstances giving rise to which,
individually or in the aggregate, do not have
and could not reasonably be expected to have
a Material Adverse Effect (it being understood
that, for purposes of determining the
accuracy of such representations and
warranties, all materiality, “Material Adverse
Effect” and similar qualifications contained in
such representations and warranties shall be
disregarded).”

Included as of signing Included as of closing


“Material Adverse Change” Condition

§  “Stand-alone” MAC condition MAC condition details (2012 deals)

“Since the date of this Agreement, there has
not been any Seller Material Adverse Neither
Change.” 3%

Stand-alone
condition
§  “Back-door” MAC condition only
27%
The Agreement includes an “Absence of
Changes” representation:
•  “Section 3.6 Absence of Changes. (i) Since the
Balance Sheet Date, there has not been any
Seller Material Adverse Change.”
Both
and includes a condition “bringing down” 57% Back-door
the accuracy of Seller’s representations condition
only
and warranties: 13%

•  “The representations and warranties made by
Seller in this Agreement shall be true and correct
in all respects when made and at the Closing
Date as if made on the Closing Date.”


“No Legal Proceedings” Condition

2012 deals

Governmental
legal
proceedings
only
Not Condition 36%
included included
§  Example condition 18% 82% Any legal
“There will not be pending [or proceeding
64%
threatened] any action, suit, or
similar legal proceeding brought
by any Governmental Entity [or
any Person] challenging or
2011 deals
seeking to restrain or prohibit the
consummation of the transactions
Governmental
contemplated herein.” legal
proceedings
only
Not Condition 34%
Included Included
20% 80% Any legal
proceeding
66%


Legal Opinions (Non-Tax) of Seller’s Counsel

Opinion required as a condition to closing

Yes* No

37% 45% 32% 50%

68%
63%

55%
50%

2009 2010 2011 2012

* Includes opinions delivered pursuant to both stand-alone and “closing deliverables” conditions.


Appraisal Rights Condition
Subset: mergers

Appraisal rights condition included Drafting details
Subset: 2012 deals with condition included
Yes* No

Minimum Appraisal rights
10% 16% 35% 40% shareholder "not available" to
approval only* percentage of
90% 17% shareholders
84% 27%

65%
60%

Appraisal rights Appraisal rights
"neither available "not exercised" by
to nor exercised percentage of
by" percentage of shareholders
shareholders 37%
19%
2009 2010 2011 2012

* Includes deals without an express appraisal rights condition but with a condition specifying a minimum percentage of shareholder votes
(on a fully-diluted basis) approving the merger, effectively waiving appraisal rights.


Appraisal Rights Condition: Thresholds
Subset: 2012 mergers with an appraisal rights condition

Condition threshold details

Up to 3% >3% to 8% >8% to 10% More than 10%

Appraisal rights "not available" to
percentage of shareholders 14% 29% 50% 7%

Appraisal rights "not exercised" by
percentage of shareholders 26% 47% 26%

Appraisal rights "neither available to
nor exercised by" percentage of 10% 60% 20% 10%
shareholders

Minimum shareholder approval only* 56% 22% 22%

* These deals did not include an express appraisal rights condition, but did include a condition specifying a minimum percentage of
shareholder votes (on a fully diluted basis) approving the merger, effectively waiving appraisal rights.


Indemnification


Stand-Alone Indemnities*
Frequency (2012 deals)

Payments to dissenting shareholders 82%
Accuracy of closing certificates 77%
Taxes 65%
Transaction expenses 47%
Litigation 42%
Purchase price adjustments 39%
Fraud and willful misrepresentation 33%
Capitalization 20%
Employee compensation 18%
Intellectual property matters 17%
Excess parachute payments under 280G 12%
Fees and costs 7%
Authority 3%
Employee benefits/ERISA 3%
Regulatory matters 2%
Third-party consents 2%
Environmental 1%
Undisclosed contracts 1%

* Line items for which indemnification is expressly provided beyond the standard line-item indemnities for Seller’s breaches of (i)
representations and warranties and (ii) covenants.

2012 SRS M&A Deal Terms Study © 2012 Shareholder Representative Services LLC. All rights reserved. Indemnification | 53

2012 M&A Deal Terms Study

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