News Archives - Petersen

Negotiating Indemnity Deductibles and Caps in M&A Deals

People during an M&A deal shaking hands and smiling because they have learned ho0w to navigate Indemnity Deductibles and Caps successfully.

In M&A transactions, indemnity provisions serve as the primary mechanism for allocating post-closing risk between buyers and sellers. While these provisions cover numerous aspects of potential liability, the negotiation of indemnity deductibles and caps often becomes the most contentious element of deal structuring. Recent market data reveals why: with actual indemnification claims appearing in roughly one-third of all transactions, getting these terms right isn’t theoretical; it directly impacts deal outcomes.

Here’s what you need to know to successfully navigate and negotiate indemnity deductibles and caps in M&A deals.

Understanding the Framework of Indemnity Deductibles and Caps in M&A Deals

Indemnity deductibles (sometimes called “baskets”) function as the buyer’s initial absorption of risk before indemnity coverage kicks in. Think of them as the equivalent of an insurance deductible: the buyer bears losses up to this threshold amount.

Caps, on the other hand, establish the seller’s maximum exposure, providing certainty around total financial risk. The interplay between these mechanisms creates different risk profiles. A “true deductible” means buyers can only recover losses exceeding the threshold amount.

A “tipping basket” structure allows buyers to recover all losses, including amounts within the deductible, once the threshold is breached.

Current Market Data

Recent studies provide concrete benchmarks for structuring these provisions:

Indemnity Deductible Trends: Most baskets equal 0.5% or less of transaction value, with 56% falling at or below this threshold. For deals over $10 million, true deductibles appear in more than 60% of transactions, making them the dominant structure. Current market data shows approximately 70% of deals use true deductibles, 26% employ tipping baskets, with hybrid approaches comprising just 4%.
Cap Analysis: Cap ranges span from 1% to 100% of purchase price, though the average has declined due to increased use of RWI. Deals with RWI consistently show lower indemnity caps compared to uninsured transactions. This correlation reflects how insurance shifts traditional buyer-seller risk allocation.
Claims Reality: Analysis of over 850 recent transactions reveals that indemnification claims occur frequently enough to make these negotiations business-critical rather than academic exercises.

Related Article: Sandbagging Clauses in M&A Agreements

The Fundamental Rep Exception of Indemnity Deductibles and Caps in M&A Deals

Most agreements carve out “fundamental representations” from standard deductible and cap structures. These core representations, covering ownership, authority, capitalization, and similar foundational matters, often carry higher caps or unlimited liability.

The rationale is straightforward: if a seller cannot validly transfer what they claim to own, standard risk allocation principles shouldn’t apply.

We regularly see disputes over what constitutes a fundamental representation, particularly regarding tax compliance, regulatory matters, and certain operational liabilities. The classification can dramatically impact potential exposure, making precise drafting essential.

Leveraging Market Intelligence for Better Outcomes

The most effective negotiations start with comprehensive market data, not theoretical risk preferences. Recent ABA studies, SRS Acquiom claims reports, and other industry analyses provide the foundation for data-driven negotiations that both parties can respect.

Our approach centers on translating this market intelligence into deal-specific strategies. When representing sellers, we demonstrate how proposed deductibles align with the 56% of deals at 0.5% or below, particularly when enhanced due diligence or RWI coverage exists. For buyers concerned about meaningful protection, we point to the one-third claims frequency rate to justify positions within established market ranges.

This data-driven approach produces faster negotiations with more durable results. Rather than arguing theoretical fairness, parties can focus on where their specific deal sits within documented market practice.

Tailoring Terms to Transaction Reality

Market benchmarks provide the starting point, not the ending point. Each transaction carries unique risk characteristics that should influence the final structure. A technology company with potential intellectual property issues presents different considerations than a manufacturing business with environmental exposure.

We work with clients to conduct thorough risk assessments that inform negotiation strategy. This might mean accepting higher deductibles in exchange for specific carve-outs, or agreeing to lower caps when paired with comprehensive RWI coverage.

The key is ensuring that the indemnity structure actually addresses the risks most likely to materialize. We’ve seen too many deals where parties fought extensively over theoretical scenarios while overlooking more probable exposure areas.

Strategic Use of Risk Transfer Tools for Indemnity Deductibles

Modern M&A practice offers several mechanisms for managing indemnity risk beyond traditional buyer-seller allocation. Escrow accounts provide immediate claim satisfaction but tie up seller capital. RWI shifts risk to third-party insurers while often reducing direct seller exposure. Earnout structures can incorporate indemnity setoff rights that streamline dispute resolution.

Each tool carries trade-offs that affect negotiation dynamics. For instance, RWI policies typically require buyers to retain the first 1% of losses, but may allow sellers to accept much lower direct caps. Understanding these interactions allows for more creative deal structures that serve both parties’ core interests.

Dispute Resolution Mechanics Matter

The best indemnity provisions mean little if disputes cannot be resolved efficiently. We focus significant attention on notice requirements, investigation periods, and resolution mechanisms.

Simple improvements, like requiring specific claim documentation or establishing clear timelines for seller responses, can prevent minor disagreements from escalating into major disputes.

Many agreements now include mandatory negotiation periods before formal dispute resolution, which we’ve found reduces both the frequency and cost of post-closing conflicts.

Practical Negotiation Strategies

Successful indemnity negotiations require balancing multiple competing interests while maintaining deal momentum. Based on our experience across hundreds of transactions, several principles consistently drive better outcomes:

Lead with market data. Positions supported by objective market evidence carry more weight than theoretical arguments about fairness or risk.
Focus on materiality. Not every representation breach deserves the same treatment. Distinguish between fundamental issues that could destroy deal value and operational matters that represent normal business risks.
Consider the total deal structure. Indemnity terms should align with other transaction elements like purchase price mechanisms, due diligence scope, and post-closing integration plans.
Plan for the future. The best indemnity provisions are ones that both parties hope never to use but feel confident will work fairly if needed.

Expert Guidance to Navigate Indemnity Deductibles and Caps in M&A Deals

Effective indemnity negotiations require both market sophistication and deal-specific judgment. With documented claims appearing in roughly one-third of transactions and clear market patterns emerging around deductible and cap structures, the negotiation process for indemnity deductibles and caps has, in many ways, become more predictable, but it is no less important.

At Petersen + Landis, we combine current market intelligence with transaction experience to help clients navigate these negotiations efficiently. Whether you’re working within the 70% of deals that use true deductibles or structuring something more tailored to your specific risk profile, our goal is to achieve terms that protect your interests while maintaining deal momentum.

Ready to discuss your M&A transaction needs?

San Diego Office
12264 El Camino Real, Suite 109
San Diego, CA 92130
Phone: 858.925.7084

Chicago Office
444 West Lake Street, 17th Floor
Chicago, IL 60606
Phone: 312.583.7488

Visit us at petersenlandis.com

September 4, 2025/by kwsm

Preparing to Sell Your Business: 4 Steps to Maximize Value

News

A smiling entrepreneur just like you as you're preparing to sell your business.

Selling your business is one of the most significant decisions you’ll make as an entrepreneur. After years of building something from the ground up, the stakes are high–both financially and personally. Success depends on adequately preparing to sell your business and having the right legal strategy from day one.

At Petersen + Landis, we’ve guided countless business owners through successful exits. The difference between deals that exceed expectations and those that fall apart often comes down to preparation. Here’s how you can prepare.

Preparing to Sell Your Business: 4 Steps to Maximize Value

Preparing to sell your business is exciting, but it can be intimidating, especially as you consider what you want to sell it for. Here are 4 steps you can take to maximize value when preparing to sell your business:

Know Your Exit Strategy
Get Your House in Order
Market Timing and Competition
The Due Diligence Process

1. Know Your Exit Strategy

Strategy buyers (competitors, suppliers, adjacent companies) typically pay premium valuations for synergies they can’t achieve organically. Private equity firms focus on growth potential, often keeping management in place and offering “two bits at the apple” through rollover equity.

The key question: What do you want post-sale? Complete exit with maximum cash, or continued involvement with upside potential? Your answer drives buyer selection.

2. Get Your House in Order

Financials First: Buyers dissect your numbers with surgical precision. Ensure three years of clean, audited statements. Address revenue concentration–if one customer represents over 20% of revenue, expect intense scrutiny. Consider a sell-side quality of earnings analysis to identify issues before buyers do.

Legal Infrastructure: Nothing kills deals faster than legal surprises. Corporate documents must reflect current ownership, key contracts need review for change-of-control provisions, and employment agreements require attention for retention planning.

Operational Excellence: Buyers invest in businesses, not jobs for sellers. Begin transitioning key responsibilities months before going to market. Document processes, diversify customer relationships, and build management depth.

3. Market Timing and Competition

Create competitive tension among multiple buyers – this typically drives 10-30% higher valuations. Avoid granting exclusivity too early, and understand that deal structure often matters more than headline purchase price.

4. The Due Diligence Process

Sophisticated sellers prepare comprehensive data rooms before engaging buyers. Organize documents logically and anticipate questions. The goal is making due diligence feel confirmatory rather than investigative.

Why Petersen + Landis Makes the Difference when Preparing to Sell Your Business

We serve as your strategic partner throughout the entire process when preparing to sell your business:

Preparation Phase: Comprehensive legal audits to resolve issues before they derail deals.
Buyer Engagement: Structure competitive processes while protecting your interests.
Due Diligence: Coordinate responses efficiently while maintaining deal momentum.
Closing & Beyond: Ensure documentation protects your interests and coordinate post-closing obligations.

Our clients consistently achieve better outcomes because we combine deep M&A expertise with genuine partnership in their success. We’ve guided sales from $5 million to over $100 million, understanding that each transaction is unique.

Ready to explore your options? Your business represents your life’s work. Let us help you realize its full value. Contact Petersen + Landis today to discuss your exit strategy.

August 22, 2025/by kwsm

Choosing the Right Business Entity: S Corp vs. C Corp vs. LLC

Corporate Transactional Law, News

A business owner going over documents to classify their business, struggling with choosing the right business entity and considering bringing in an attorney.

One of the most critical decisions for any new business is choosing the right business entity. This decision can have far-reaching implications, and if not given careful consideration, it can be the difference between a business that reaches its full potential and a business that flounders, crashes, and burns. This decision can affect everything from liability, taxation, raising capital, and day-to-day operations. However, this is complex territory to navigate alone. We are more than happy to summarize the key advantages and disadvantages of the three most common business structures, C corporations, S corporations, and LLCs.

Here are some of the most important factors to consider to ensure you know how to choose the right business structure when starting your business.

S Corp vs. C Corp vs. LLC

The main difference in S Corp vs. C Corp vs. LLC is rooted in their tax structures, ownership limitations, and administrative burdens. LLCs and S-Corps are both known for their pass-through taxation, which avoids the double taxation issue that C-Corps face. However, S-Corps have strict limits on the number and type of shareholders, whereas C-Corps and LLCs offer more flexibility in ownership, making them better suited for different business goals and growth strategies. This is a critical factor when choosing which structure is right for you, as it will determine how you can raise capital and distribute profits.

Choosing the Right Business Entity: S Corp vs. C Corp vs. LLC

When you are choosing the right business entity, you generally have 3 different options: an LLC, an S Corporation, or a C Corporation. Deciding between each can be daunting, and you’re probably wondering, What type of business entity should I choose? We’re here to help.

Choosing the right business structure means understanding your unique business needs, the pros and cons when debating an S-Corp vs. C-Corp vs. LLC, and which one best aligns with your goals and vision. So, let’s get into it, starting with the pros and cons of an S-Corp!

Pros and Cons of an S Corporation (S-Corp)

The first type of entity you will encounter when trying to determine how to choose the right business structure is an S Corporation, also called an S-Corp. This type of structure offers some key advantages that you might want to capitalize on. Here are the pros of an S-Corp structure:

Pass-Through Taxation: Income, losses, deductions, and credits flow directly to shareholders, avoiding the double taxation seen with C-Corps.
Liability Protection: Like a C-Corp, an S-Corp generally shields shareholders from personal liability with very limited exceptions.
Tax Benefits: Shareholders can claim business losses on personal tax returns, potentially lowering overall tax liability. Shareholders can also, after paying themselves a reasonable salary, take additional profits from the company in the form of distributions, for which there is no self-employment tax imposed for Social Security or Medicare, resulting in cost savings for the shareholders (ie, 15.3% tax savings at the federal level).

It’s important to note that this type of business entity also has drawbacks that you should consider to ensure they are worth the reward. Here are the cons of an S-Corp structure:

Shareholder Limitations: S-Corps are limited to 100 shareholders, and all must be U.S. citizens or residents. In addition, with very limited exceptions, an entity cannot be an owner of an S-Corp. For example, a C-Corp or an LLC with more than one member could never be a shareholder in an S-Corp.
Stock and Distribution Restrictions: Only one class of stock is allowed, which can limit flexibility in fundraising. In addition, the shareholders must receive any distributions from the S-Corp in the exact pro rata amounts of their percentage ownership of shares in the company. Therefore, if the ownership percentages were 50%-30%-20%, those three shareholders could only receive distributions from the company in those precise percentage amounts. This rigidity makes an S-Corp more difficult to use with businesses where the owners desire some flexibility as to how they pay themselves.
Increased IRS Scrutiny: The IRS often closely examines S-Corps to ensure compliance with their rigorous distribution and salary requirements, and failure to comply with those requirements can lead to the termination of a company’s S election, which can have adverse tax consequences.

Pros and Cons of a C Corporation (“C-Corp”)

Similarly, the second structure you will encounter when weighing your options and choosing the right business entity is the C Corporation, also called a “C-Corp.” This type of structure has some benefits that could be appealing depending on your situation.

The pros of a C-Corp structure are as follows:

Unlimited Growth Potential: C-Corps can issue multiple classes of stock and an unlimited number of shares, making them ideal for attracting investors and for a business with an objective of eventually going public.
Separate Legal Entity: Shareholders enjoy limited liability, meaning personal assets are generally protected, save for very limited exceptions.
Tax Advantaged for Reinvestment: Profits retained within the corporation are taxed at the corporate rate, which can be advantageous for growth-focused businesses looking to reinvest those profits in the business or ancillary businesses.
Easier to Raise Capital: C-Corps are the preferred structure for venture capitalists and other savvy institutional investors due to point number 1 above, as well as the various limitations that an S-Corp or LLC has with regard to raising capital at a heightened level or their suitability for serving as a vehicle for going public.

Still, there are some drawbacks that you should consider. Here are some of the most pertinent cons of using a C-Corp structure:

Double Taxation: Profits are taxed at the corporate level, and dividends distributed to shareholders are taxed again on personal returns. Therefore, many business owners do not find C-Corps suitable if the chief objective of the business is to distribute profits to owners rather than the owners receiving all compensation via salary payments.
Complexity and Costs: Formation and compliance requirements, such as annual filings and board meetings, can be time-consuming and expensive.
Inflexibility: C-Corps are highly regulated, and changes to the business structure require formal procedures.

Pros and Cons of a Limited Liability Company (LLC)

The final choice that’s important to go over that you will surely encounter when choosing the right business structure is a Limited Liability Company, or an LLC. Here are some advantages of an LLC that are important for you to know:

Greatest Flexibility: LLCs can choose to be taxed as a sole proprietorship, partnership, or corporation, offering significant flexibility. A multi-member LLC taxed as a partnership has the discretion to pay its members (ie, owners of the LLC) virtually any way it wishes, allowing for the greatest amount of flexibility.
Limited Liability: Members’ personal assets are generally protected from the company’s liabilities with very limited exceptions.
Fewer Formalities: LLCs are not required to hold annual meetings or have a board of directors, and thus legal compliance is simpler and less costly than with other entities.
Pass-Through Taxation: Income and losses flow directly to members, avoiding the double taxation issue seen with C-Corps.

Like the other types of business structures, an LLC is not without its drawbacks. Here are some important cons of an LLC you should be aware of:

Self-Employment Taxes: Members must pay self-employment taxes on their share of the profits, which can be higher than corporate taxes.
Limited Growth Potential: LLCs are, by their nature and statutory law, designed to suit smaller business enterprises, and thus investors often prefer corporations, especially if the company plans to raise significant capital or go public.
Varying State Laws: Rules governing LLCs differ by state, which can add complexity for businesses operating in multiple jurisdictions.

Key Considerations for Choosing the Right Business Entity

When deciding on the right structure, entrepreneurs should consider several factors to make a strategic and informed decision that positions them for future prosperity. Here are 6 key considerations that will determine how to choose the right business structure:

Growth Plans: If your goal is to attract venture capital or go public, a C-Corp might be the best choice.
Tax Implications: Evaluate how the entity will impact your personal and business taxes. S-Corps and LLCs offer pass-through taxation, while C-Corps have corporate taxes. An S-Corp allows for tax savings for its owners by avoiding payment of self-employment tax on distributions, but also has rigorous requirements for who can hold S-Corp stock and how distributions may be paid.
Liability Protection: All three entities provide limited liability, but compliance is crucial to maintain this protection.
Cost and Complexity: LLCs are generally easier and cheaper to form and maintain, while corporations require more formalities.
Number and Type of Owners: S-Corps have strict shareholder requirements, while C-Corps and LLCs offer more flexibility.
Long-Term Vision: Consider the scalability of your business structure, especially if you plan to expand nationally or internationally.

Set Your Business Up for Success from the Start with Expert Guidance in Choosing the Right Business Entity.

Choosing the right business entity is a critical decision that can dictate its success, so it’s not one to take lightly. That’s why understanding how to choose the right business structure is so crucial – this simple decision you make at the start can, in some ways, determine its fate. While each structure offers distinct benefits, it’s important to assess your business goals, industry, and future plans before making a choice. A professional can help you decide what’s best for you.

Consulting with an experienced attorney, like those at Petersen + Landis, P.C., can ensure your business is set up for success from the start. Contact us today to learn how we can help.

Disclaimer: This blog post is for informational purposes only, and is not intended to be, nor shall it be considered, legal advice in any way. The topics herein are addressed in a general manner, whereas anyone seeking legal advice should consult with any attorney personally to address the specific facts and circumstances surrounding one’s personal legal objectives and needs.

August 8, 2025/by Julie

THE M&A MARKET IS POISED FOR AN UPTICK

Mergers & Acquisitions, News

Charging Bull sculpture in New York City

During the course of the pandemic, middle market M&A had an unprecedented level of deal activity due to a variety of factors, chief among them low interest rates, the large influx of capital into private equity, and a common belief among sellers that tax rates would soon increase with the Democratic party controlling the executive and legislative branches after the 2020 elections.

That robust activity encountered numerous headwinds last year, however, with the Federal Reserve increasing interest rates to combat inflation that had been persistent with continuing supply chain issues and elevated energy prices. For 2023, U.S. private equity deal volumes have been initially reported to be down 27% from their 2021 peak, and down 19% from 2022. U.S. corporate M&A transactions for deals greater than $100 million are expected to be down 38% in 2023 compared to the 2021 peak and down 9% from 2022.

Toward the end of last year, with interest rates stabilizing, supply chain issues finally seeming to resolve, and with pent up deal demand after a sluggish end of 2022 and into 2023, the M&A market showed signs of increased activity across the board. Private equity deal volume in 2023 increased in each successive quarter after a very sluggish start. Bloomberg recently reported that both major and boutique investment banking firms are staffing up for 2024 in anticipation of increased M&A activity. A number of M&A deal sites have reported an uptick in activity on their platforms across a broad range of industries. And Ernst & Young recently projected in its Deal Barometer that U.S. private equity deal volume would be up 13% in 2024, with corporate M&A activity increasing by 12%.

All these favorable market conditions should provide a significant boost for middle market deal activity, which weathered the adverse conditions of the past year fairly well, given the lesser impact of higher interest rates on deals in that range. The general expectation on interest rates for 2024 is that the Federal Reserve will cut rates by 75 to 100 basis points, which will afford buyers in that space even greater flexibility to do deals.

In addition to more favorable market conditions, fast-growing industry segments like Artificial Intelligence and its ancillary businesses provide additional fuel for deal flow to increase this year and beyond. Technology in general helped sustain deal activity during 2023, accounting for nearly one-third of private equity activity by value for the past year. Much like the stock markets for 2023, then, technology was the driving force. Not to be discounted from a sector analysis is health care, which accounted for 10% of private equity activity by value, a significant increase which is expected to grow in light of an aging population and strong performance by companies in the field.

For middle market M&A, manufacturing and distribution will as always continue to be strong segments in 2024, with a large number of attractive prospects that combine long-running track records of performance, strong reputations in their industries and opportunities to achieve significant efficiencies through scaling and technological optimization. Look for manufacturing and distribution deals to be very robust in 2024 as buyers come off the sidelines to acquire strategic fits.

And of course, demographics continue to be favorable for the middle market, with a significant number of business owners in the baby boom generation poised to sell their companies and retire. Again, pent up demand on both the buy side, with some buyers choosing to remain on the sidelines for the past 18 months, and the sell side, as owners waited for better deal conditions to re-emerge, should serve to further increase deal flow for this year.

In sum, although 2023 saw a slight downturn in middle market M&A activity given the historical heights that preceded it, all signs point to a return to form in 2024, with both buyers and sellers eager to engage in M&A transactions.

January 22, 2024/by The Law Offices of Jeff Petersen Team

DEI for legal teams

Corporate Transactional Law, News

DEI for Legal Teams

What legal responsibilities do business owners have to implement Diversity, Equity, and Inclusion into the workplace and how can a well-executed DEI strategy positively impact valuation? It is important for organizations to not only have strategies for implementing DEI and anti-harassment policies but also to implement them through effective training. Keeping employees safe and creating an inclusive workspace is not only smart from a culture and engagement perspective, it is always wise to reduce the risk of an employment lawsuit.

Training is not only for simply meeting compliance requirements, it can highlight different perspectives on the company culture and open the dialogue to create opportunities for team bonding, changes in HR policies, and increase productivity in the workplace by increasing the sense of ownership and agency employees have.

Training is no longer the sole purview of Human Resources, rather it is now a joint effort of leadership, HR, and the legal department of any mid-sized and larger organization.

DEI Training

When considering the costs of both diversity, equity and inclusion training and harassment prevention training, especially in a hybrid or remote world of work it can be easy to overlook the hidden risk-cost of not engaging in effective training.

Consider remote sessions with small teams as a way to keep the company running while creating “pods” of team members who are bonded through their experience and also able to disseminate their learning to other teams in the organization. (this is not a replacement for each person receiving training, of course).

Spending more money on an effective, motivating training program may, in fact, save money on time spent by employees, leadership and legal doing endless sessions to no positive impact. Starting with leadership and working your way down to those in middle management ensures that the message is consistent, that everyone is on board, and that the message doesn’t disappear after the training is over.

An Ounce of Prevention

From a risk management perspective, the cost of prevention is easily offset by not only the risk of harassment or discrimination action but also by the compliance requirements of each state.

Employment lawsuit damages and penalties can be significant if you lose, and legal fees in the hundreds of thousands even if you win. By adopting a comprehensive anti-harassment policy and providing effective training, employers can show that they have taken active steps to create a positive, inclusive and safe workspace.

Losing employees because of poor company culture, an unsafe workplace, or lack of diversity has costs to the employee in their pain and suffering and also costs to the organization in lower morale and therefore lower productivity, increased resignation rates, damage to brand reputation, and brand loyalty and increased insurance costs.

Weigh the cost of high-quality training against those of failing to promote a safe and inclusive workplace and company culture to truly understand the cost of DEI and harassment training.

How to Select a DEI Training Company

High-quality content, engaging activities, real-world experience, and well-presented experiences are essential to employee engagement. A “cheesy” or out-of-touch free-online course is likely to backfire causing employees to out the efforts on social media as ineffective and creating a hostile workplace environment to try another type of training program in the future.

By giving employees and management a high-quality experience the message is that leadership is invested in the DEI initiative, that tolerance for harassment or exclusion is very low and that the employees must take the program seriously.

Programs that include real-world experiences and immersive training in emotional intelligence and leadership strategies can change behaviors, not only of potential harassers but of bystanders and the company as a whole.

A well-executed DEI training program can create lasting and positive change. And that is priceless.

Disclaimer: The foregoing blog post does not constitute legal advice, but instead only addresses the general topic of DEI Training. Anyone seeking legal advice should consult with an attorney regarding its specific circumstances and needs.

January 11, 2022/by The Law Offices of Jeff Petersen Team

Chinese Companies Delisting off the NYSE

News, Securities Law

Chinese companies are delisting off the N.Y.S.E.

According to a December 2021 article from the New York Times, dozens of Chinese companies publicly traded on the N.Y.S.E. may be delisted over the course of the next three years because of ongoing disputes over audit transparency in Chinese and Hong Kong-based accounting firms.

The United States and China have been arguing about the audit issue for roughly more than a decade since the 2011 meeting and agreements signed by President Barack Obama and President Hu Jintao.

At issue are audit standards for publicly traded companies.

The Securities and Exchange Commission currently has the authority to delist The Securities and Exchange Commission currently has the authority to delist companies that do not have approved overseas audits. The Public Company Accounting Oversight Board (the “PCAOB”) has thus far been unable to fully inspect the audit papers and other documents of accounting firms in China and Hong Kong. These pending audits will affect the listings of such entities as Didi Rideshare and more than 190 other companies in a similar situation.

The aforementioned accounting firms have signed audit reports for nearly 200 publicly listed companies on the N.Y.S.E.. Those companies all run the similar risk of being delisted if the transparency requirements of the PCAOB are not met. The potentially non-compliant audit reports account for a combined global market capitalization of $1.9 trillion.

China is increasingly willing to trade on the Hong Kong exchange and leave the American markets indefinitely. At the start of 2021, China Telecom, China Unicom, China is increasingly willing to trade on the Hong Kong exchange and leave the American markets indefinitely. At the start of 2021, China Telecom, China Unicom, and China Mobile were delisted by the N.Y.S.E. to comply with an executive order that barred Americans from investing in companies with ties to the Chinese military. This and the recent delisting of Didi indicates that investors in the US will have to risk Chinese fiscal oversight regulations and less transparency if they want to invest in the companies now listed exclusively on the Hong Kong Stock Exchange.

January 4, 2022/by The Law Offices of Jeff Petersen Team

M&A trends for 2022

Mergers & Acquisitions, News

The road ahead for Mergers & Acquisitions

2021 saw robust mergers and acquisitions activity. As the year came to a close, there has been no sign that this trend of increased M&A activity will slow down. So, what trends should business owners and M&A attorneys look for in 2022? Hindsight is 2020… well, it’s 2021 but who’s counting?

The drivers of increased M&A activity

Looking back at the year 2021, the greatest drivers of the increased M&A activity were COVID’s impact both on business owners’ choice to retire or sell, and on their choice to grow into new markets through well-priced sales of companies who struggled during the shutdown and supply chain disruptions that followed. Increased liquidity affected M&A volume driven by PPP loans, EIDL loans and low-interest rates making capital less expensive. And the change in the world of work from analog to digital, accelerated by the remote work surge that has bolstered SaaS, digital security, and other remote-work facilitation hard and software companies.

Looking forward to 2022

It is challenging to predict the trends that will define the coming year. One thing COVID has taught the business community is that the unexpected can throw a wrench into the best-laid plans at any moment. While we can look at the past year to see how certain language and activity is affecting the M&A markets right now, these are inferences, not a crystal ball to predict the future. One way to look at the coming shifts is to look at the changes in volume of certain terms in SEC filings in M&A transactions that have closed over the past 2 years. As we look at the 2022 market trends we can see that there are upticks in reported language in those SEC filings of M&A closings as reported in Bloomberg Law’s article here. The trends indicate that certain terms are appearing more in the last quarter of 2021 than in previous years by notable amounts.

“Remote work”

“ESG”

“Climate Change”

“Crypto”

And because this is now year 3 of the pandemic and we show no signs of moving past it, “COVID” and “vaccine” rank among the terms which have seen marked upticks in the latter half of 2021.

According to other surveys from MiBiz,”automotive, energy, financial services, technology and media, and health care rank as the top five most-active sectors for [2022]”.

Environmental, Social, and Corporate Governance (ESG) and its impact on M&A volume

In addition to shifts in the interest in ESG and climate-friendly business, the Private Equity activity in 2021 has been strong. Despite impending tax legislation and increased antitrust scrutiny, business owners continue to seek to diversify their portfolios by acquiring companies that give them access to new products, services, and technologies. With PE funding more accessible than ever, the M&A landscape seems to be robust and headed for another bull year.

The fact that the Biden Build Back Better legislation appears stalled for the foreseeable future means that increased business taxes are now pushed off into the future means that businesses who acquire or merge will not face the kind of tax bracket jump that they would have under the proposed bill. This roadblock removal may stoke the fires of the already hot M&A market.

Overall the 4 major players in the 2022 M&A market can be culled down to:

1: A hot Private Equity Market

In 2021, PE transaction value rose more than 55%

2: ESG forces

Businesses may consider purchasing or divesting assets to align with ESG. Practically speaking environmental factors will affect the future of business and strong ESG will allow businesses to better adapt to those shifts.

3: Remote work

Digital transformation of analog processes means more investment in SaaS companies and other cloud-based initiatives. From cyber security to remote teams management, digital is the way forward.

4: Inflation

The sharp spike in inflation may mean a temporary slowing of M&A activity, though the inflation between 2007 – 2009 did nothing to curb Mergers and Acquisitions. This inflationary bubble is likely to dissolve with low interest rates still in place once the supply chain issues resolve.

To sum it all up:

The M&A market is not slowing down. Successful M&A strategies will involve specific industry targeting and an awareness of the elevated valuations that exist in certain market sectors. Increased deal complexity will necessitate better assessments of risk and liability as well as stringent due diligence processes and targeting of the correct funding sources for each transaction.

December 22, 2021/by The Law Offices of Jeff Petersen Team

SANDBAGGING CLAUSES IN M&A AGREEMENTS

Mergers & Acquisitions, News

Agreement For The Sale Of A Business

In an agreement for the sale of a business, there will be a number of representations and warranties by the seller across the spectrum of the company’s business, including its ownership of assets, its financial condition, its compliance with a variety of laws (among others, employment and environmental laws), and the existence of any adverse material events. If an issue arises post-closing that violates the representations and warranties, then the indemnity provisions in the agreement will dictate that the seller must compensate the buyer for any resulting loss, including payment of attorneys’ fees, settlements, judgments, etc.

What Is A Sandbagging Clause?

A sandbagging clause refers to a provision in an M&A agreement that addresses whether a buyer’s pre-closing knowledge about the cause of a subsequent loss will have on the buyer’s indemnity claim. The colloquial term “sandbagging” refers to whether or not the buyer can know about the facts giving rise to the loss and still claim indemnity, or “sandbag” the seller by moving ahead with knowledge of a material issue.

There are two types of sandbagging clauses, a pro-sandbagging clause that allows the buyer to have knowledge of the facts giving rise to the loss and still receive indemnification, or an anti-sandbagging clause, which prohibits buyer from receiving indemnity if it knew of the facts giving rise to the loss.

Although it may seem counter-intuitive to allow for pro-sandbagging clauses where a buyer can recover despite closing with knowledge of the problem, there are good reasons for such a clause to be included. One is that prohibiting buyer from recovering would provide a disincentive to conduct thorough due diligence, as the buyer would not want to discover facts that could later bar indemnification. Anti-sandbagging clauses will also give rise to disputes regarding buyer’s knowledge before closing. Perhaps the buyer’s best argument, however, is that listing the problematic matter in the disclosure schedule is the best way to address any post-closing issues, as the parties can negotiate appropriate provisions ahead of time if necessary, e.g., buyer can either accept the disclosure and bear the risk going forward, or require that seller provide express indemnity for the matter so listed.

A seller’s rebuttal on this issue is that a pro-sandbagging clause would allow the buyer to discover an issue in due diligence and not inform the seller, which could provide a disincentive to the buyer to raise the issue ahead of time and address with the seller in the agreement.

M&A Agreements & Pro-Sandbagging Clauses

In terms of market prevalence, pro-sandbagging clauses are far more common in M&A agreements, generally due to the fact that buyers hold the keys (i.e., money) to the deal and are generally not inclined to restrict their rights on important issues like indemnification. Although recent statistics show that it is quite common for M&A agreements not to address sandbagging at all, that should not be taken as an indicator that the concept is often ignored. Many state laws themselves provide an answer as to whether a buyer can “sandbag” the seller if the agreement does not address the issue, and buyers will generally choose a state law that is pro-sandbagging.

Although a seller will generally be faced with an agreement that will allow for sandbagging, either by express clause or application of state law, being armed with that knowledge will help the seller focus more intently on its due diligence process, and negotiate appropriate provisions for any items that do arise. And those sellers in a strong negotiating position can look at an anti-sandbagging clause as a good “get” in negotiating the transaction.

November 10, 2021/by The Law Offices of Jeff Petersen Team

FLORIDA MAN BEING SENTENCED FOR WIRE FRAUD IN CONNECTION WITH TRADING COMPANY

News

The United States Attorney’s Office for the Southern District of Florida issued a press release about a Kissimmee, Florida resident being sentenced to more than seventeen years in prison after having been convicted at trial of wire fraud.

Previous Records

Michael John Alcocer Roa had previously been convicted at trial by a jury of five counts of wire fraud, in violation of Title 18, United States Code, Section 1343. U.S. District Court Senior Judge Patricia A. Seitz sentenced Alocer to 210 months’ imprisonment, to be followed by 3 years of supervised release. He is also subject to a potential restitution order.

The press release asserted that Alcocer set up a Florida corporation called Inovatrade Inc. (“Inovatrade”) in October 2008 and between 2008 and 2011, Alcocer told people they could trade foreign currencies at Inovatrade, set up managed accounts in which others could trade foreign currencies on their behalf, or earn guaranteed interest payments of approximately 15% per year or greater. Alcocer represented during this time that Inovatrade maintained all its clients’ accounts segregated, safeguarded, and protected in a trust account.

Excuses and Cash Outs

The U.S. Attorney’s Office went on to state that based on those and other representations, Inovatrade received over $7 million from customers, who were sent detailed account statements over time. But when individuals requested to withdraw their money from Inovatrade, many were unable to do so, receiving instead a litany of excuses from Alocer.

The press release stated that financial records associated with Inovatrade and Alcocer introduced at trial showed little to no actual trading took place in the Inovatrade accounts, and that Alcocer cashed out and transferred millions of dollars of that money from the Inovatrade accounts to personal accounts in the United States and in Panama.

The U.S. Attorney’s Office press release can be found at the following link:

https://www.justice.gov/usao-sdfl/pr/kissimmee-resident-sentenced-more-17-years-wire-fraud

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of regulatory enforcement actions. She can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.

October 30, 2020/by The Law Offices of Jeff Petersen Team

TEXAS OIL COMPANY PAYS $5.4 MILLION TO SETTLE SEC SUIT

News

The SEC entered into a settlement on its recently-filed securities suit against defendants Southlake Resources Group, LLC (“Southlake”), Cody Winters, and Nicholas Hamilton. The defendants consented to entry of the SEC’s proposed final judgments without admitting or denying the allegations in the SEC’s complaint.

Joint Ventures

The SEC alleged that from approximately June 2010 through approximately September 2014, Winters, directly and through Southlake, a company he owned and controlled, raised more than $5.2 million from more than 70 investors in 26 states by selling interests in several oil-and-gas joint ventures. None of the offerings were registered with the Commission, and none of the individuals that Winters and Southlake employed to cold call potential investors, including Hamilton, were registered with the SEC as a broker or associated with a registered broker.

Misinformation On Productions and Revenue

The SEC further alleged that in written offering material provided to investors, Winters and Southlake made untrue and misleading statements and omissions of material facts regarding, the use of offering proceeds, projections for oil-and-gas production and revenue, and commingling and loaning investor funds. In addition, the SEC alleged that in each offering, Winters overstated the projected well costs by almost 100% and omitted to disclose to investors Southlake’s actual cost and profit information.

Finally, the SEC alleged that at Winters’ direction, Southlake engaged in conduct contrary to written representations to investors about the use of offering proceeds. For example, Southlake took undisclosed profit and overhead payments from the offering proceeds and used offering proceeds to acquire working interests for itself in undisclosed transactions.

The consent agreement with the SEC required the company to pay back $5,235,650 collected from investors, plus $285,761.70 in interest, as well as penalty payment from Winters and Hamilton of $160,000 and $50,000, respectively.

Jeff Petersen is an attorney licensed to practice in California and Illinois representing clients in a wide variety of SEC investigations and enforcement matters. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.

October 29, 2020/by The Law Offices of Jeff Petersen Team