Western Independent Banker - May/June 2008 - (Page 22) By Gary M. Horgan and S. Alan Rosen Hidden Hazards in the M&A Process time is usually necessary), such technical defaults may result in having to renegotiate a lease or adjust the pricing or extend the term of a contract. More obvious are the “change in control” triggers in employment arrangements of all types. These contracts must be analyzed for the amounts payable at the closing and for rights that may vest upon merger but are only due later. Some rights are absolute, and others arise only on the occurrence of later events, such as a change in the employee’s status, and may be avoided if care is taken. On a related topic, it is essential to avoid the 280G trap or to adjust your pricing accordingly. 280G is an IRS provision that applies to excess “golden parachute” benefits for senior officers that arise due to a change in ownership and subjects the entire “parachute” payment (not just the excess) to a 20 percent excise tax. Also, the entire amount is disqualified as a corporate tax deduction. Be aware, the IRS includes the value of accelerated (unvested) options and other compensation items, and not just the direct severance benefits when calculating the “golden parachute.” Obviously, this is a simplified overview of a complex issue and there may be ways to restructure the payments to eliminate the problem, expert advice is needed and the earlier the better for all concerned. While on the subject of the earlier the better, in our experience that should also apply to the acquiror’s negotiations with the target’s management. Too often the reasonable expectations of the parties are not mutually held and difficulties arise that could have been avoided if addressed early in the negotiations. And further with respect to management, a crucial part of any merger negotiation is the non-competition provisions that are meant to keep the sellers from going back into business and eroding the customer base for which the acquiror has paid a substantial premium. While directors are often willing to agree to such restrictions, obtaining such agreements from senior officers can be problematic. If the parties want to be reasonable, an accommodation can usually be reached. Sometimes this involves a non-compete that is very limited in territory or downgrading it to a non-solicitation agreement in which the officer undertakes not to solicit customers or employees from the merged bank. However, a recalcitrant officer or a stubborn acquiror may imperil an entire transaction. Skillful negotiation is essential if this problem arises. Tempers have to be cooled and the parties need to thoughtfully consider their best interests and to work out a reasonable compromise that protects the acquiror and permits the officer to earn a living. While not usually fatal, this is one landmine that can really cause unanticipated problems. A merger may be a great way to expand your business and enhance profitability. Or, it may be a lucrative exit strategy rewarding years of effort. But there are pitfalls that can be fatal to any deal. Being aware and flexible, keeping your eye on the goal and having experienced professionals to guide you is the best way to ensure success. Gary M. Horgan and S. Alan Rosen are partners in the banking law firm of Horgan, Rosen, Beckham & Coren, L.L.P. in Calabasas, Calif. They can be reached at (818) 591-2121 or at ghorgan@horganrosen.com or arosen@horganrosen.com respectively. OFTEN, IT’S A surprise. A sudden phone call from the chairman or president of a valued client announcing, excitedly, that the bank has a handshake deal to sell out or, perhaps, to acquire another institution. Now the real surprises begin – and some of them are not all that pleasant. First, the “handshake” alone may have triggered a violation of law. At least in California, a state bank, using stock as a part of the merger consideration, must obtain a regulatory permit prior to negotiating the deal. But for a $50 fee and some embarrassment and groveling, this problem can be fi xed. Other surprises will arise during the due diligence and in negotiating the definitive agreement that may be far more problematic. During the diligence process, there is more to review than loans, deposits and investments. Buried in many contracts are “change in control” provisions that may spring to life with a merger. These may trigger defaults under leases, data processing and other agreements for services. Unless waived in advance (and a long lead During the diligence process, there is more to review than loans, deposits and investments. Buried in many contracts are “change in control” provisions that may spring to life with a merger. 22 www.wib.org Western Independent Banker http://www.wib.org
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