In the recent In-House Connect webinar, “Letters of Intent in M&A Transactions for In-House Counsel,” experts Sam Raboy Brian Schutlz, and Chelsea Abramowitz from Ice Miller LLP shared critical insights into the role of Letters of Intent (LOIs) in mergers and acquisitions (M&A). The session offered practical guidance on managing complex transactions and highlighted essential terms and considerations to streamline the M&A process.
Here are the five key takeaways:
- Strategic Tax Considerations
One of the major discussion points was the role of tax structuring within LOIs. The session highlighted the contrasting preferences of sellers and buyers—sellers generally favor stock sales while buyers prefer asset sales. Various tax-efficient structuring options, such as section 338(h)(10) elections, section 336(e) elections, and F reorganizations, were emphasized as they can significantly impact the transaction’s tax outcomes, making them crucial considerations in LOIs.
- Rollover Transactions and Incentive Alignment
The advantages of rollover transactions, where sellers invest a portion of their equity into the post-closing entity, were discussed. This approach aligns the sellers’ interests with the future success of the company and reduces the cash required for the transaction. Including terms related to future equity rights and obligations in the LOI can streamline later negotiations and ensure smoother transitions.
- Earnouts: Structuring and Dispute Prevention
Earnouts, which involve contingent payments based on the company’s performance post-closing, were flagged as a potential source of conflict. The importance of clearly defining performance targets, such as EBITDA, and including relevant add backs and covenants was stressed. Ensuring transparency and protection for payment can help avoid disputes and ensure that the earnout structure is fair and effective.
- Retention and Escrow in RWI Deals
The discussion on Retention and Representation and Warranty Insurance (RWI) underscored the importance of meticulous planning. Determining appropriate retention amounts and escrow placements was noted as essential, with the survival period for different representations typically ranging from 12 to 18 months, and specialist representations lasting even longer. Selecting a reputable insurer known for reliable claims payout was highlighted as a key factor in successful RWI transactions.
- Streamlined Transaction Structures in LOIs
To facilitate a more efficient transaction process, it was recommended to include key legal terms directly in the LOI. By addressing fundamental issues such as liability items, purchase price allocation, and tax matters early on, in-house counsel can reduce costs and avoid protracted negotiations, leading to a smoother M&A transaction overall.
The webinar provided valuable insights into the strategic use of LOIs in M&A transactions. By focusing on strategic tax considerations, leveraging rollover transactions, carefully structuring earnouts, planning RWI details, and incorporating essential terms, in-house counsel can enhance their effectiveness and achieve more favorable outcomes for their organizations.
Missed The Webinar? You can watch it now via IHC On-Demand!
