Whats Market

2008 LBO Legal Issues Survey

This presentation contains Attorney Advertising.

KAYE SCHOLER LLP

Basis of Survey
2

Survey criteria: Acquisitions by Private Equity Funds of privately held businesses Acquisitions funded with debt under Rule 144A that were later registered under the Securities Act of 1933, as amended, on Form S-4 Agreements entered into from January 1, 2002 through June 1, 2007

Private Equity Sponsor Groups

3

Including:

Apollo Management, LP Bain Capital Berkshire Hathaway Inc. The Blackstone Group Bruckmann, Rosser, Sherrill & Co. The Carlyle Group Castle Harlan, Inc. Caxton - Iseman Capital CCMP Capital Advisors Cerberus CSFB Private Equity Cypress Group DLJ Merchant Banking Fenway Partners, Inc. GS Capital Partners (Goldman Sachs) GTCR Golder Rauner, LLC H.I.G. Capital LLC Jefferies Capital Partners

J.W. Childs Associates Kohlberg & Co. Madison Dearborn Partners Merrill Lynch Global Private Equity Morgan Stanley Capital Partners Onex Corporation One Equity Partners Ripplewood Holdings Summit Partners Texas Pacific Group Thoma Cressey Equity Partners Thomas H. Lee Partners Veritas Capital Management Vestar Capital Partners Warburg Pincus LLP Welsch Carson Anderson & Stowe Wind Point Partners

Purchase Price

KAYE SCHOLER LLP

Range of Purchase Prices

5

The transactions included in the survey range in value as follows:

Year 2007 2006 2005 2004 2003 2002 # of Deals 3 11 16 35 21 9 Range of Purchase Prices $2,162-$4,152 M $125-$3,703 M $180-$2,300 M $125-$3,900 M $165-$4,200 M $90-$4,300 M Average $3,207 M $965 M $775 M $906 M $814 M $1,222 M

Total

95

$90-$4,300 M

$973 M

Range of Purchase Prices

What are the Size of the Deals Included in this Survey?
6
20 20 18 16 14 14 12 12 10 8 6 4 4 2 2 0 0 Up to $250 Million
2002

5 4 3 4 3 3 3 3 3 3

0 $250 Million to $1 Billion

2003 2004 2005 2006 2007

Over $1 Billion

Purchase Price Adjustments

KAYE SCHOLER LLP

Purchase Price Adjustment

What Percentage of Deals Utilized a Purchase Price Adjustment?
8

No Adjustment 13%

Includes Adjustment 87%

Typical Purchase Price Adjustments

How Often are the Most Typical Purchase Price Adjustments Used?
9

70% 60%

62%

50%
40% 30%

43%

20%
8% 10% 0% Income Statement Inventory Net Working Capital Net Worth Other 3%

6%

One-Way or Two-Way?
Was Purchase Price Adjustment One-Way or Two-Way?
10

One-Way 22%

Two-Way 78%

Indemnification

KAYE SCHOLER LLP

Cap on General Indemnity Claims

Example
12

The Buyer Indemnified Persons will not be entitled to recover more than an aggregate of $xx,xxx,xxx (the Cap) from the Sellers with respect to all Losses indemnifiable pursuant to this Section.

Cap on General Indemnity Claims

Where Do Cap Amounts Typically Fall?
13

Cap Less Than Purchase Price 78%

Cap Equal To Purchase Price 2% Unlimited Cap 1% No Survival 19%

Cap on General Indemnity Claims

What is Average Cap as a Percentage of Purchase Price? (Excludes No Survival and Unlimited Cap Deals)
14

20% 16.4% 16.6% 14.1% 15.1%

15%

10%

5%

0%

All Years

All Deals

up to $250 million

$250 Million to $1 Billion

over $1 Billion

Adjusted Cap on General Indemnity Claims

Adjusted to Exclusive Any Cap Over 20%
15

15% 11.2% 10% 8.2% 7.1% 8.20%

5%

0% All Years All Deals

up to $250 million

$250 Million to $1 Billion

over $1 Billion

Cap on General Indemnity Claims By Year

What Is Average Cap As a Percentage of Purchase Price in Each Year? (Excludes No Survival and Unlimited Cap Deals)
16

30% 25.2% 25% 21.0% 19.5% 20% 17.6% 16.0% 14.5% 15% 12.4% 11.9% 10.3% 10% 7.4% 14.6% 13.7%

5%

0% 2002 & 2003 2004

up to $250 million

2005
$250 Million to $1 Billion over $1 Billion

2006 & 2007

Adjusted Cap on General Indemnity Claims By Year

Adjusted to Exclude Caps above 20%
17

16.0% 14.6% 14.0% 14.0%

12.0%

11.2% 9.6%

10.0%

9.0%

9.3% 7.7%

8.0%

7.4%

6.9% 5.3% 4.8% 4.5%

6.0%

4.0%

2.0%

0.0% 2002-2003
up to $250 million

2004
$250 million + to 1 Billion

2005
over 1 Billion

2006-2007

Escrow To Support Indemnification

(Excludes No Survival Deals) What Percentage of Deals Include an Escrow or Holdback to Support Indemnity Claims?
18

No Credit Support 38% Escrow 58%

Holdback 4%

Carve-Outs From Indemnity Caps

What are the Typical Carve-outs from the Cap on Indemnification?
19

50%

45%
45%

45%

40% 34% 31% 30%

35%

25%

20%

18% 14%

15%

10%

7%

5%

0% Assumed Liabilities ERISA No Brokers Other

Indemnity Threshold (Basket)

Example of Deductible and Dollar-One Thresholds
20

Deductible. Sellers will have no liability (for indemnification or otherwise) with respect to the matters described in clause (d) of Section 10.2 until the total of all Damages with respect to such matters exceeds $___________, and then only for the amount by which such Damages exceed $________.

Dollar-One. Sellers will have no liability (for indemnification or otherwise) with respect to the matters described in clause (d) of Section 10.2 until the total of all Damages with respect to such matters exceeds $___________ but then shall be liable for all such Damages.

(Source: ABA Model Stock Purchase Agreement)

Dollar One vs. Deductible

What Percentage of Deals With a Threshold Include Dollar One or a Deductible?
21

Dollar One 10%

Deductible 90%

Thresholds As Percentage Of Purchase Price

How Large Are Thresholds As a Percentage of Purchase Price?
22

1.00%
0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.6% 0.7%

0.9% 0.8%

0.20%
0.10% 0.00% Up To $250 Million $250 Million to $1 Billion Over $1 Billion Total Average of All Deals

Mini-Basket
What Percentage of Deals Include a De Minimis Amount for Each Indemnifiable Claim?
23

Does Not Include Mini-Basket 35%

Includes Mini-Basket 65%

Materiality Read Out

What Percentage of Deals Read Out Materiality from Indemnification Claim?
24

Materiality Read-Out 20%

Materiality Threshold Must Be Satisfied 80%

Survival of General Indemnity Claims

How Long is the Survival Period for General Indemnity Claims?
25

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% No Survival Less than 12 Months 12+ - 18 Months 18+ - 24 Months More than 24 Months Unlimited 10% 23% 20% 39%

8% 1%

Survival Carve-outs
What are the Typical Survival Carve-outs?
26

60%

56%

49%

50%

47%

45%

40%
35%

30%

29% 25%

20%

18%

10%

10% 8% 6% 8% 6%

10%
4%

8% 4% 1%

0%

79%

Taxes

51%

ERISA

Environmental

61%

Title

56%

Power & Authority

64%

Capitalization

60%

Statute of Limitation

Unlimited

Specified Number of Years

Stand Alone Indemnities

What are the Typical Stand-Alone Indemnities? (Excludes No Survival Deals)
27

60% 50% 40% 28% 30%

57%

20%

20%
10% 0% Environmental ERISA Taxes Other
Other Stand Alone Indemnities Included: non-assumed liabilities, brokers fees, employee matters, title defects, and particular litigation

7%

Set-Off for Tax Benefits of Indemnity Claim

What Percentage of Deals Include a Reduction or Set-Off for Tax Benefits Related to an Indemnity Claim?
28

Does Not Include a Tax Reduction/Set-Off 40%

Includes a Tax Reduction/ Set-Off 60%

Set-Off for Insurance Proceeds

What Percentage of Deals Include a Reduction or Set-Off for Insurance Proceeds Received for Claimed Item?
29

Includes an Insurance Reduction/SetOff 82%

Does Not Include an Insurance Reduction/Set-Off 18%

Indemnification as Exclusive Remedy

Was Indemnification the Exclusive Remedy for Most Types of Claims?
30

No 16%

Yes 84%

Included Types of Damages

What Types of Damages are Specifically Included in Indemnification?
31

25% 22%

20%

15%

10% 7% 5% 5% 5% 4% 3% 3%

0% Consequential Damages Dimunition of Value/Multiplier Incidental Damages Lost Profits Other Similar Damages Punitive Damages Special Damages

Excluded Types of Damages

What Types of Damages are Explicitly Excluded from Indemnification?
32

70%

68%

60% 54% 50% 43% 40% 37%

46%

30% 25%

20%
20%

10%

0%

Consequential Damages

Dimunition of Value/Multiplier

Incidental Damages

Lost Profits

Other Similar Damages

Punitive Damages

Special Damages

Alternative Dispute Resolution

33

What Percentage of Deals Utilize ADR Mechanisms?

What Type of ADR Did those Deals Use?

Includes ADR 15%

Mediation Then Binding Arbitration 7% Mediation 14%

Does Not Include ADR 85%

Binding Arbitration 79%

Private Equity Sellers - Indemnification Issues

(As a Percentage of Enterprise Value)
34

9.0%

8.4%

Average Survival: 17 Months

8.0%

7.0%

6.0%

5.0%

4.0%

3.5%

3.0%

2.0%

0.7%
1.0%

0.0% Escrow Cap Basket

Closing Conditions

KAYE SCHOLER LLP

Bring-Down of Representations and Warranties As Closing Condition

Example - MAE Bring Down
36

All of Sellers representations and warranties in this Agreement must have been accurate in all material respects as of the date of this Agreement, and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, without giving effect to any supplement to the Disclosure Letter; provided, however, that this condition shall be deemed to have been satisfied unless the impact of all inaccuracies of representations and warranties (without giving effect to qualifications of materiality or similar qualifiers) would be reasonably likely to have a Material Adverse Effect.

Bring-Down of Representations and Warranties as Closing Condition

Example - Materiality Bring-Down (No Double-Counting)
37

Each of the representations and warranties made by the Shareholders in this Agreement that are not qualified as to materiality or Material Adverse Effect shall be true and correct in all material respects and each of the representations and warranties of the Shareholders that are qualified as to materiality or Material Adverse Effect shall be true and correct in all respects.

Bring-Down of Representations and Warranties as Closing Condition

What Are Typical Bring-Down Formulations?
38

When Made?

Level of Materiality?

Other 1%

Flat Bring-Down 8%

Other 3%

Materiality Bring-Down 9%

Only At Closing 44% At Signing and Closing 55%

MAE Bring-Down 48%

Materiality Bring-Down (No Double-Counting) 32%

MAE Bring Down Broken Down by Years

What % of Deals in each Year Use MAE Bring Down?
39

80.0% 71.0% 70.0% 60.0% 60.0% 56.0%

50.0% 43.0%

40.0%

30.0%

20.0%

10.0%

0.0% 2002-2003 2004 2005 2006-2007

Express No MAC Closing Condition

Example
40

Since the date of this Agreement, there shall not have occurred any condition, change or event that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

Express and Back-Door MACs

What Percentage of Deals Use Express MAC Closing Condition or So-called Back-Door MAC?
41

90% 80%
70% 60% 50% 40% 30% 20% 10% 0% Express MAC Closing Condition

81%

73%
60%

6%

MAC Representation ("Back- Both MAC Condition & MAC Neither MAC Condition nor Door" MAC) Rep MAC Rep

Material Adverse Effect or Material Adverse Change

Example
42

Material Adverse Effect means any change, development, effect or condition that, individually or in the aggregate, has had, or is reasonably likely to have, a material and adverse effect on the business, properties, assets, liabilities, condition (financial or otherwise), prospects or results of operations of the Company and its subsidiaries, taken as a whole;...

Material Adverse Effect

What Percentage of Deals with MAE Definition include the Term Prospects?
43

"Prospects" Included 14%

"Prospects" Not Included 86%

Material Adverse Effect Carve-Outs

Example
44

...provided, however, that none of the following shall be taken into account in determining whether there has been a Material Adverse Effect: (1) the effects of changes that are generally applicable to the industry and markets in which the Company and its subsidiaries operate, (2) the effects of changes that are generally applicable to the United States economy or securities markets or the world economy or international securities markets or (3) any effects on the employees, suppliers, licensors or customers of the Company and its subsidiaries directly resulting from the public announcement of this Agreement, the transactions contemplated hereby or the consummation of such transactions;

MAE Carve-Outs
What are the Typical Carve-outs to the Material Adverse Effect Definition?
45

90.00% 81.10% 80.00% 71.60% 70.00%

60.00% 54.70%

50.00% 41.10% 40.00% 37.90% 34.70% 42.10% 40.00%

30.00%

20.00% 11.60% 10.00%

0.00% Acts of God Terrorism War Compliance with the Terms of the Agreement The announcement or pendency of the transactions contemplated by the agreement Changes in GAAP Conditions arising out of changes in laws or regulations Changes In Target's Industry General economic or business conditions

MAE Carve-Outs By Year

What are the Trends for MAE Carve-outs?
46
2002-2003 2004 2005 2006-2007

100% 93% 88% 86% 86% 88%

90%

79% 80% 71% 70%

79%

77%

67%

60%

56% 57% 54%

56%

56%

50% 50% 44% 40% 40% 31% 30% 27% 43% 43%

30%

20%

10% 10%

0%

Terrorism

Compliance with the Terms of the Agreement

The announcement or pendency of the transactions contemplated by the agreement

Conditions arising out of changes in lows or regulations

Changes in Targets industry

General economic or business conditions

Financing Outs
What Percentage of Deals Include a Condition that Buyer Receives Financing?
47

Doesn't Include Condition 22%

Includes Condition 78%

Legal Opinion Condition

What Percentage of Deals Require the Delivery of a Buyers or Sellers Counsel Legal Opinion?
48

49.5% 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 27.4%

10.0%
5.0% 0.0% Delivered by Buyer's Counsel Delivered by Seller's Counsel

Financing Outs Break down by Years

49

100.0% 100% 90% 81.0% 73.0% 71.0%

80%
70% 60% 50% 40% 27% 30% 20% 10% 0%

29.0% 19.0%

0.0% 2002 & 2003 2004 2005 2006 & 2007

Does Not Include Condition

Includes Condition

Sellers and Companys Representations and Warranties

KAYE SCHOLER LLP

No Undisclosed Liabilities Representation

Example
51

Except as set forth in the Disclosure Letter, the Acquired Companies have no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in the Ordinary Course of Business since the respective dates thereof.

(Source: ABA Model Stock Purchase Agreement)

No Undisclosed Liabilities Representation

What Percentage of Deals include a No Undisclosed Liabilities Representation?
52

What portion is qualified by knowledge?

Does Not Include Rep 8%

Includes Knowledge Qualifier 11%

Includes Rep 92%

Does Not Include Knowledge Qualifier 89%

No Undisclosed Liabilities Representation

What are Typical Carve-Outs from No Undisclosed Liabilities Representation?
53

77.90% 80.00%

78.90%

70.00% 55.80%

60.00%

50.00% 38.90% 40.00%

37.90%
33.70%

30.00%

20.00%

10.00%

0.00%

Carve-Out for Liabilities Reflected/Reserved Against

Immaterial Liabilities/ Liabilities Not Rising to MAE

Limited to GAAP Liabilities

Limited to Liabilities Incurred - Ordinary Course

Other

Set Forth on Schedule

Full Disclosure (10b-5) Representation

Example
54

No representation or warranty of Sellers in this Agreement and no statement in the Disclosure Letter omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

(Source: ABA Model Stock Purchase Agreement)

Full Disclosure (10b-5) Representation

What Percentage of Deals include a Full Disclosure (10b-5) Representation?
55

Includes Rep 19%

Does Not Include Rep 81%

No Other Representations
Example
56

Except for the representations and warranties of Seller contained in this Agreement and Seller's Schedules, Seller makes no express or implied representation or warranty to Buyer.

No Other Representations
What Percentage of Deals include a No Other Representation Rep?
57

Does Not Include Rep 32%

Includes Rep 68%

Knowledge Definition
What Standards Apply to Definition of Knowledge?
58

100.00% 90.00%

91.10%

80.00%
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 5.60% 53.30% 42.20%

Actual after Investigation

Actual Without Investigation

Constructive Knowledge

List of Identified Persons/Positions

Buyers Representations and Warranties

KAYE SCHOLER LLP

Financing Representation
What Percentage of Deals Include a Financing Representation by Buyer?
60

Type of Financing Rep?

Current Ability to Finance the Deal 10%

Does Not Include Rep 14%

Includes Rep 86%

Description of How Deal will be Financed 90%

Buyers Solvency Representation

Example
61

Based on information heretofore provided by the Company to the Purchaser and assuming the accuracy of the Company's representations and warranties under this Agreement, immediately following the Closing, (a) the property of the Company, at a fair valuation, exceeds the sum of its debts (including contingent and unliquidated debts) and (b) the Company shall be able to pay its debts as they mature.

Buyers Solvency Representation

What Percentage of Deals include a Buyers Solvency Representation?
62

Includes Rep 19% Does Not Include Rep 81%

Covenants

KAYE SCHOLER LLP

No-Shop/Exclusivity Covenant
What Percentage of Deals include an Express No Shop/Exclusivity Covenant?
64

Does Not Include Covenant 22%

Includes Covenant 78%

Non-Compete and Non-Solicit Covenants

What Percentage of Deals have Non-Compete or Non-Solicit Covenants and, if Limited by Time, How Long are Average Limits?
65

Average Length: 38.3 Months

Average Length: 28.1 Months

Average Length: 34.9 Months

48.40%

50.00%
43.20% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 12.60% 15.00% 10.00% 5.00% 0.00% Non-Compete Provision Non-Solicit Employees Non-Solicit Customers

HSR Obligation to Divest

What Percentage of Deals with an Express Obligation to Clear Hart-Scott-Rodino Include or Negate an Obligation to Divest Assets?
66

No Obligation to Divest 10%

Obligation to Divest 12%

Silent 78%

HSR Covenant
Who Pays the HSR Fee?
67

Buyer 33%

Shared by Buyer and Seller 24%

Silent 43%

Updating and Sandbagging

KAYE SCHOLER LLP

Covenant to Update
Example
69

Between the date of this Agreement and the Closing Date, each Seller will promptly notify Buyer in writing if such Seller or any Acquired Company becomes aware of any fact or condition that causes or constitutes a Breach of any of Sellers representations and warranties as of the date of this Agreement. Should any such fact or condition require any change in the Disclosure Letter, if the Disclosure Letter were dated the date of the occurrence or discovery of any such fact or condition, Sellers will promptly deliver to Buyer a supplement to the Disclosure Letter specifying such change.
(Source: ABA Model Stock Purchase Agreement)

Covenant to Update
70

What Percentage of Deals Requires Seller to Update its Schedules or Advise of Breach of Representation?

What is the Effect of Updating?

Buyer may not terminate, but update does not affect the Buyer's right to be indemnified 6% Buyer may not terminate and buyer has no right to indemnity 3%

Obligated to Notify 38%

Silent 46%

Buyer must chose either to terminate the agreement or accept the update 29%

Silent 62%

Permitted to Update or Supplement Schedules 15% Prohibited from Updating or Supplementing Schedules 1%

Sandbagging and Anti-Sandbagging

What are Typical Provisions with Respect to Sandbagging?
71

60.00% 60.00%

50.00%

40.00% 25.30%

30.00%

20.00%

11.60%

10.00%

0.00% Anti-Sandbagging (No indemnification if Express Pro-Sandbagging (Buyer's Buyer had knowledge of breach) knowledge of breach does NOT affect indemnity) Silent

Chicago . Frankfurt . London . Los Angeles . New York . Shanghai . Washington D.C. . West Palm Beach

Kaye Scholer Private Equity Group

72
Laurie Abramowitz (Tax - NY) 212.836.7038 labramowitz@kayescholer.com Lauren Bernstein (Acquisition Finance - NY) 212.836.7091 lbernstein@kayescholer.com Steven G. Canner (NY) 212.836.8136 scanner@kayescholer.com Russ Cashdan (LA) 310.788.1168 rcashdan@kayescholer.com Emanuel S. Cherney (NY) 212.836.7061 echerney@kayescholer.com Barry Dastin (LA) 310.788.1070 bdastin@kayescholer.com Simon Firth (Fund Formation - London) (44) 20.7105.0583 sfirth@kayescholer.com Nancy E. Fuchs (NY) 212.836.8565 nfuchs@kayescholer.com Edmond Gabbay (Acquisition Finance - NY) 212.836.8876 egabbay@kayescholer.com Sheryl Gittlitz (Acquisition Finance - NY) 212.836.8119 sgittlitz@kayescholer.com Adam H. Golden (NY) 212.836.8673 agolden@kayescholer.com Joel I. Greenberg (NY) 212.836.8201 jigreenberg@kayescholer.com Rory A. Greiss (NY) 212.836.8261 rgreiss@kayescholer.com Mark Kingsley (NY) 212.836.7092 mkingsley@kayescholer.com Russell N. Pallesen (Chicago) 312.583.2345 rpallesen@kayescholer.com Marci Settle (NY) 212.836.8399 msettle@kayescholer.com Timothy Spangler (Fund Formation - NY/London) 212.836.8502 (44) 20.7105.0582 tspangler@kayescholer.com Derek M. Stoldt (NY) 212.836.8032 dstoldt@kayescholer.com Louis Tuchman (Tax - NY) 212.836.8267 ltuchman@kayescholer.com William E. Wallace, Jr. (NY) 212.836.8556 wwallace@kayescholer.com Arthur F. Woodard (Tax - NY) 212.836.8005 awoodard@kayescholer.com Thomas Yadlon (NY) 212.836.7166 tyadlon@kayescholer.com

Lynn Toby Fisher (NY) 212.836.8685 lfisher@kayescholer.com

Stuart Fleet (London) (44) 20.7105.0576 sfleet@kayescholer.com

Stephen C. Koval (NY) 212.836.8019 skoval@kayescholer.com

Jeffrey L. London (Tax - Chicago) 312.583.2339 jllondon@kayescholer.com

Kaye Scholer refers to Kaye Scholer LLP and its affiliates operating in various jurisdictions.