Paul Temple – A Man We Will Miss

Paul Temple, skilled attorney, treasured colleague, and dear friend, died unexpectedly on August 23, 2021. His considerable professional gifts were a boon to his clients, and a blessing to those he mentored. We here at AlphaTech already miss his ready smile, his sardonic wit, and steady confidence as we struggle to accept life without Paul.

We are fortunate that Paul made such an impact on all of us, and left us so many fond memories to serve as a balm during this time. He was sincerely proud of our accomplishments together, and wanted the world (or at least everyone on State Street in Madison) to know what we achieved. So much so, he surprised us all by renting out the marquee at The Orpheum Theater to celebrate AlphaTech’s 10th anniversary. Paul was also fiercely loyal both to his friends and to every cause he believed in. His loyalty was steadfast, even when it was unwise, like the time that Paul unfortunately, albeit proudly, wore a Chicago Cubs jersey, hat, and Cubs shorts (somehow!) to a Brewers game. Paul was also a loving father and husband. We readily recall the sheer joy on Paul’s face after his son was born.  We also admired how he fulfilled a life-long dream of obtaining his pilot’s license and occasionally took some of our more adventurous team members on private flights.  We will forever miss the passion that he displayed for life and as an advocate and mentor for the companies with whom he worked as an attorney.

We are lucky to have had Paul in our lives, to know him, and to be known by him. His absence is a gap that cannot be filled. We are grateful to his wife, Molly, and his son, Jack, for letting him share his days with us. Our deepest sympathies to his parents, Steve and Mary Ann, to Molly’s parents, Tom and Diane, and to Molly’s sister, Allie.

We certainly don’t have a monopoly on Paul stories. We would appreciate your sharing of any anecdotes, memorable experiences, and photos of Paul at PTempleMemorial@gmail.com.  From the submissions, we plan to put together a memory book to share with Jack and Molly.

In lieu of flowers or gifts, if you would like to share your thoughts directly to the family, Molly has requested that you send messages to rememberingpaultemple@gmail.com, or if you would like to make a donation in Paul’s honor, feel free to do so for one of the organizations listed in Paul’s obituary (https://www.ryanfuneralservice.com/obituary/Paul-Temple).

Paul’s family is planning a memorial service in Madison, sometime in late September. There will be some ability to participate remotely in the service.  We will post more details when they become available.

Keeping Company Sale Proceeds: Indemnification-Related Provisions

In the vast majority of sales of privately held emerging companies, the indemnification-related provisions are the most important outside of the purchase price itself—these provisions often determine whether the seller may hold on to the amount paid by the buyer.  I say “indemnification-related” as it is typically not the indemnification provisions themselves that are most important.  Rather, it is the provisions that define and limit the rights to indemnification, determine how damages are calculated, and state when the rights can be exercised.

For example, the upper limit of the amount of indemnification damages that a seller is responsible for in the event that there is an indemnification claim (commonly referred to as the “cap”), is often more important to the seller than the indemnification language itself, which can be written fairly broadly.

While the indemnification-related provisions are important, they are relatively complex and interrelated.  A negotiating “win” in one area for a seller, such as a low cap on the amount of indemnification damages available to a purchaser, can be negated by a negotiating “loss” in another area, such as broad exclusions from the cap.  Because of how these provisions are interrelated, we usually review and negotiate them in their entirety.

Here is an outline of indemnification-related issues that are often negotiated in a company-sale transaction:

  • Survival of representations and duration to make indemnification claims
    • Duration of survival of “fundamental” representations
    • Duration of survival of other representations
    • Time period to make indemnification claims
    • Exclusions from any of the above
  • Sandbagging
    • Anti-sandbagging provisions
    • Pro-sandbagging provisions
    • Silent
    • Nonreliance provisions
  • Indemnification as the exclusive remedy
    • Covering all transaction-related documents
    • Exceptions to the exclusive remedy
  • Cap
    • Amount
    • Exclusions
  • Basket
    • Amount
    • Exclusions
    • Deductible or first dollar
  • Materiality Scrape
    • None
    • Single
      • Breach
      • Damages
    • Double
  • Indemnification damage reduction
    • Tax benefits to buyer
    • Items covered by insurance
    • Buyer obligation to mitigate losses

As indemnification and related provisions are complex and sometimes difficult to understand, they are frequently glossed over by those who do not have the background (or patience) to take the time to understand them.  These provisions, however, can have a significant impact on the financial end result of the sale transaction.  Having a comprehensive negotiating strategy when negotiating indemnification-related provisions is often crucial to a successful sale transaction.

Company Sale Structure Considerations

In this AlphaTakes video, Matt Storms discusses the common considerations that drive the decision on how to structure a company sale transaction.

Here are the key takeaways from this video:

  1. The most common considerations that affect the transaction structure for the sale of a privately held emerging company are taxes, assignment of contracts, seller shareholder approval, transfer of licenses and permits, ability to exclude certain assets or liabilities, and simplicity.
  2. Which factors are important are often deal specific.
  3. While no transaction structure is right for all deals, an asset sale transaction is used most frequently in privately held emerging company sales.

Software Deals Using the Customer’s Form

Ever try to license software or provide SaaS to a Fortune 500 company or some other high profile company? Did they insist on working from “their paper”? You know enough not to simply hope for the best and sign whatever contract they put in front of you, but you also don’t want to delay further a months-long sales effort over the paperwork. What do you do?

The Customer’s Form Contract

You want the deal, so you tell them to send you the draft. BigCo sends you its contract. It’s a long, complex document that rivals the King James Bible. You send it to your lawyer, who spends an hour or two reviewing it. The lawyer comes back with a list of concerns that go something like this:

  • The intellectual property terms don’t apply to the deal you’re trying to close. You simply want to provide access to your SaaS platform, and the contract has your company assigning over all of its IP – effectively preventing you from offering a SaaS platform to your other customers.
  • The security terms are totally overbearing. You’ll only receive publicly available, anonymized information, but the contract has your company submitting to monthly penetration tests, annual SOC 2 Type 2 audits across all five principles, and background checks on all your employees by a third party of your customer’s choosing.
  • The renewal and termination provisions give your customer a right to terminate at any time, for any reason, with a pro-rata refund.

You then call your counterpart at BigCo and negotiate the renewal and termination provisions, while your lawyer rewrites the intellectual property and security terms. You’ve now spent your own relationship capital negotiating a key term, you’ve spent money on legal expenses, and the revisions haven’t even been sent to your customer’s attorney yet. Worse still, you’re beginning to wonder why they sent over a contract that requires this much hassle.

Here’s the problem: When they told you they wanted to work from their paper, you felt like you were in no position to negotiate. You spent a long time to get the deal to that point, and the economics were finally set. Your counterpart may have even said, “Our legal can be a pain. I don’t like having to deal with them, but it’s how we do things at BigCo.”

A Better Way Forward

Assuming you are even willing to work from their form, consider an alternative. Imagine instead that you told your counterpart at BigCo, “Certain legal items are really important to us. They are X, Y and Z. If we can work from a contract with those included, I’m confident the lawyers can hammer out the rest and we can quickly get this deal done.”

So what are X, Y, and Z? Here’s a sample of issues that are critical in many software deals:

  • Intellectual Property – Are you assigning your software (literally giving the code and full ownership to your customer), licensing it and reserving ownership rights to yourself, providing user access to a SaaS platform, or something else?
  • Data – If you’re providing a SaaS platform, who is responsible for the content of the data uploaded into it? Who owns it? What can (and can’t) you and your customer do with it?
  • Termination – Under what circumstances can your customer terminate the agreement?

Obviously that’s not an exhaustive list, and critical issues vary from deal to deal and company to company. Ideally, you already know your X, Y and Z.

When you communicate key legal concerns the moment you are willing to concede on using their paper, you send some important signals to BigCo:

  • You’re willing to work with them if they’re willing to work with you.
  • You know that the legal terms matter, and you know which issues are especially critical for your deal.
  • You want to learn quickly whether they will insist on dealbreaker terms.
  • You will expedite the process to get the deal done.

If your counterpart at BigCo also wants to get the deal done soon, your message will reach BigCo’s legal department. And if BigCo’s legal department takes cues from your counterpart, you’re much more likely to receive an agreement that actually applies to your deal. This saves everyone time and money in the long run.

But suppose your counterpart doesn’t want to close quickly or doesn’t relay your message, or suppose the legal team doesn’t take cues from your counterpart. Suppose the contract you receive from BigCo’s legal department isn’t any better. Are you really any worse off than if you had not tried this approach?

AlphaTakes – Structures for a Company Sale Transaction

In this AlphaTakes video, Matt Storms discusses the most common types of deal structures for a company sale transaction.

Here are the key takeaways from this video:

  1. There are a variety of ways to structure a company sale transaction.
  2. The most common types of deal structures are an asset sale, stock sale, and merger.
  3. The most common types of merger structures are a direct merger, a forward triangular merger, and a reverse triangular merger.
  4. Making a sale transaction tax free is often complex.

 

A Company Sale NDA is Different

A common misperception is that all Confidential Disclosure and Nondisclosure Agreements (NDAs) are virtually the same. In other words, many people think that it doesn’t matter whether an NDA is for a vendor, customer, employee, strategic, or potential sale transaction—a standard NDA should be sufficient. The truth is, they are and should be different. This is especially true in the company sale context.
Here are some ways that company sale NDAs can be different:

(1) Definition of confidential information

The description of what constitutes confidential information in typical NDAs does not include a number of things that a seller often wants kept confidential in the sale context—most notably, the fact that the seller is considering selling the business or that the buyer and the seller are interested in a sale transaction.

(2) Permitted use of confidential information

A general use restriction seen in “standard” NDAs is often insufficient as a limitation on use of confidential information shared in the company sale context. Moreover, if the buyer is in private equity or is another type of financial sponsor, a limitation on using the confidential information only in connection with the consideration of a potential acquisition of the seller may not be adequate. It often does not limit the disclosure of confidential information to other potential buyers as part of a “clubbing” deal, which sometimes is counter to the seller’s desire to create competition among suitors.

(3) Who the buyer can share the information with

Many NDAs typically restrict disclosure of information by the recipient to those within the recipient’s organization who “need to know” for the stated purpose. Often, in the company sale context, buyers need to also share that information with financing sources, investment bankers, transaction consultants, lawyers, and others.

(4) Non-solicitation of seller’s employees and customers

While it is uncommon to see restrictions on solicitation of a party’s employees and customers in the typical NDA, it is more common to see the matter covered in a company sale NDA as those relationships are more vulnerable in the sale context, especially if the employees and customers know that the seller is interested in selling.

(5) Antitrust requirements

If the buyer is a competitor, provisions and processes should be included that address antitrust concerns.

(6) Seller point person

It is somewhat common to see an individual within the seller’s organization designated as a point person for whom the buyer must work through to obtain confidential information. The intentional procedural bottleneck is designed to ensure that relevant people within the seller’s organization are appropriately briefed, that certain people within the seller’s organization are not contacted by the buyer, and to some extent, keep track of the confidential information that is disclosed.

(7) Seller’s form of NDA

A common issue in many commercial transactions is whose form NDA should be used. In the company sale context, however, use of the seller’s form of NDA is the norm. Also, it is more common to see the NDA in the form of a letter, countersigned by the potential buyer, rather than the standard form of two-party agreement.

Because of some of the unique issues that arise in company sale transactions, sellers should craft the form of NDA they use with those unique issues in mind and not rely on forms or templates used in other contexts.