USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Vinita Sithapathy, Kristina Trauger, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters
ing macroeconomic and market environments, many businesses are postponing their IPOs. Consequently, investors often prefer a private sale since it offers a simpler process and provides liquidity faster. 3.2 Choice of Listing US companies are typically taken public on a US exchange, particularly if their shareholder base is primarily domestic. US exchanges offer significant market liquidity and are integral to global financial activities, making them attractive for capital raising and trading. 3.3 Impact of the Choice of Listing on Future M&A Transactions US-based companies rarely choose to list on foreign exchanges. When they do list on a foreign exchange (especially if some of their securities are held by US investors), complex issues can arise, particularly in M&A transactions, including conflicts of law and com- pliance challenges with the regulations of the target country. 4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process To achieve the highest price and optimal terms, sell- ers frequently employ auction processes to generate momentum. During an auction, sellers will give potential buyers a confidential information memorandum, and the poten- tial buyers will then submit their initial indications of interest. Potential buyers then normally submit their markup of the auction draft as part of their final bid, typically four to eight weeks after the initial indica- tions of interest. Signing of the transaction agreement generally follows shortly after the seller’s receipt of the final bids and selection of the winning bidder. 4.2 Liquidity Event: Transaction Structure A typical transaction structure for the sale of a private- ly held technology company with multiple investors is usually carried out as a merger, asset purchase or stock purchase. Companies may also sell a controlling
interest while offering investors the choice to remain shareholders. 4.3 Liquidity Event: Form of Consideration For acquisitions involving a private target, the consid- eration is often all cash payments; however, if a buyer is publicly traded, consideration could also consist of a mix of cash and stock, or all stock. Where there is a significant gap regarding valuation of the target company, parties may structure the pur- chase price such that the buyer pays a lower upfront price for the target company but then makes addi- tional earn-out payments when certain business mile- stones are attained. These milestones may be tied to sales, revenue or, in certain industries such as biotech, regulatory approval of products developed or owned by the target. Alternatively, the buyer may offer some of its stock as part of the consideration so that the target company’s shareholders, pre-acquisition, can indirectly benefit from the post-acquisition success of the target company. 4.4 Liquidity Event: Certain Transaction Terms Negotiation of Indemnification Provisions It is standard practice in the USA to use indemnifica- tion clauses as contractual tools for risk allocation. These clauses allow parties to agree in advance as to who will bear the liability associated with specific risks related to the contract (eg, breaches of representa- tions and warranties in a purchase agreement). The indemnifying party (usually the seller) will typi- cally seek to limit their exposure to the indemnified liabilities by including various limitations, such as de minimis claims thresholds, deductibles, caps, etc, and by insisting on a time limit in the purchase agreement for the survival of the representations, warranties and indemnification clauses post-closing. Representation and Warranty Insurance In the US, buy-side representations and warranties insurance (RWI) policies continue to be used in pri- vate-target M&A (although their use appears to be declining when compared to the period immediately following the COVID-19 pandemic). The presence of RWI in a transaction can alter some of the standard market practice points described previously.
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