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acquirer had already discovered the inaccuracy as a result of the due diligence
investigation it conducted. This really makes the enforcement of the indemnification
provisions very difficult for the acquirer.

Glover: I completely agree. If you’re on the buy side, a provision that says that you
can’t recover if you knew about a problem is completely unacceptable. The tough choice
faced by the acquirer is this: Do you raise the issue and ask for language expressly
permitting sandbagging? Or do you just stay silent and then run the risk that you’ll have
to debate in front of a judge whether the agreement should be interpreted to preclude
recovery where you knew about a breach in advance.

Chu: It’s important when you’re representing the target, if you’re going to request
an anti‐sandbagging clause in the negotiations, to do it with the clients in the room. I’ve
found that an anti‐sandbagging provision makes a lot of sense to the business people
because it appeals to their sense of fairness. But if you’re just talking to the acquirer’s
lawyer and you’re trying to negotiate this, you’ll lose almost every time, for the very
reasons that Rick and Steve highlighted.

Climan: I’d like to discuss the type of escrow that has become "market" or
"standard" in these public‐private mergers.

When "pooling‐of‐interests" accounting was alive and well (before it was
eliminated last year), the pooling rules said that only 10% of the stock issued in a merger
could be held back in an escrow as a means of supporting the acquirer’s indemnification
remedy for breaches of the target’s reps and warranties. In my experience, that rule
tended to "infect" non‐pooling deals to the point where, at least here in the Silicon Valley,
the 10% escrow/holdback became something of a standard, even in deals not accounted
for as pooling.

What did your survey show as to the typical size of the escrow in public‐private
merger transactions?

Glover: It’s interesting. I’m actually seeing more escrows now than I did four or
five years ago. I did a similar study about four years ago, and the percentage of deals with
escrows was smaller then than it is today.

I think you’re right, Rick. The pooling concepts created some momentum for this
10% idea, although people aren’t adhering to that religiously. My review suggests that
"market" for escrows is somewhere between 10% and 15% of the purchase price, with
the rare deal at 20%. The Houlihan Lokey study found essentially the same thing. I think
the median in their deal sample was 10%.

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