On 17 June 2019, Australian enterprise software company Atlassian (NASDAQ: TEAM) released the Atlassian Term Sheet, a new mergers and acquisitions (M&A) term sheet that will be a blueprint for its acquisitions going forward. The Term Sheet is based on Atlassian's experience as a serial dealmaker, having acquired more than 20 companies worth more than $1 billion in aggregate since 2002.
How does the term sheet measure up, and why would Atlassian take this approach? Has any other company done something similar, and should your business follow suit?
What's in the Term Sheet?
The Atlassian Term Sheet contains a list of common items found in M&A term sheets, and Atlassian's standard approach to each item. Some are customary, for example, standard provisions regarding due diligence, deal documents, closing, the proposed purchase price, exclusivity and non-competes. Atlassian also provides detail on its approach to more contentious items, for example, outlining their general position on indemnities, the escrow amount, and representations and warranties insurance (R&W insurance, otherwise known in Australia as warranty and indemnity insurance). The Term Sheet is followed by a schedule outlining - for different types of claims - the monetary cap, survival period and whether the "tipping basket" (claim threshold) applies.
The key commercial terms are, of course, not populated in the Term Sheet. However, in an accompanying briefing note by Tom Kennedy (Chief Legal Officer) and Chris Hecht (Head of Corporate Development), Atlassian outlines the key trends it has observed from data from hundreds of technology acquisitions in the last five years that have influenced how Atlassian has crafted its Term Sheet. This includes the observation that escrow funds have become much larger than necessary and that intellectual property and privacy claims rarely exceed, and should therefore be capped at, escrow (and not drafted as special representations).
What are the advantages of this approach?
According to the briefing note, publicising the Atlassian Term Sheet is seen as a way to be fair and transparent, to make the M&A process "more efficient, human, and aligned with why we acquire companies (and the incredible founders and teams behind them)". With this visibility of Atlassian's approach to M&A, the hope is that founders will have a greater sense of what to expect during initial deal discussions, and that all parties will spend less time negotiating and more time on integration planning, organisational structure and retention strategies.
From a practical perspective, the Atlassian Term Sheet is useful for entities looking to be acquired by Atlassian, given that it clearly specifies the standard terms that Atlassian is prepared to begin negotiations from in a standard transaction. The expectation is that Atlassian will act relatively consistently with these terms, at least from a starting position, and the fact that this has been made publically available suggests that Atlassian has carefully considered its risk profile and its appetite for more M&A.
What are the challenges of this approach?
A publicly available term sheet (albeit not fully populated) enables competing purchasers to better, or at least match, those terms. For example, Atlassian has provided that sellers (for transactions over USD$50 million) can either choose between providing 5% of the Purchase Price in escrow for 15 months, or providing 1% escrow for 15 months and obtaining (and paying for) buy-side R&W insurance coverage for the remaining 4%. Also, while the Term Sheet provides the basis for negotiation, it would naturally need to be adapted depending on the transaction and jurisdiction of the target. This is particularly pertinent when it comes to dealing with target companies and/or other counterparties from a non-US jurisdiction, where what is considered "market practice" may differ considerably.
On a practical level, there is also the reality that "market practice" in M&A is never static, and will change with time, and market and industry fluctuations, for example. While Atlassian has not indicated whether it plans to issue updates to its term sheet, it would presumably do so over time (or cease publishing the Term Sheet altogether).
Has anyone else done something similar?
There are other examples of documentation being made available, although none readily made available in this way by potential acquirers. In the Australian context, the Australian Private Equity and Venture Capital Association (AVCAL) have released a suite of "Open Source Seed Financing Documents" for use by founders and investors. According to AVCAL, the aim of releasing these documents is to “increase transparency and efficiency” during the capital raising process and “create a set of documents that are both startup and investor friendly”, some of which Atlassian appears to echo. Something similar also exists in the American context with the National Venture Capital Association offering a range of model legal documents as a free resource to the community.
Looking more broadly beyond M&A and venture capital, other industry bodies have also developed model documents for use by industry body members and legal practitioners. For example, AMPLA, an organisation for Australian energy and resources lawyers, has prepared and published a range of model documents, including mining joint venture agreements and mining services contracts. The same would hold true for various other industries (not to mention the start-ups already in full force disrupting the legal industry with their new legal document drafting software under the NewLaw model).
What about your business?
Organisations should carefully consider whether they will publicly disclose potential deal terms. While publicly releasing a term sheet like Atlassian has some obvious benefits, for example, sending a clear message of consistency and a willingness to transact to the market, not every company is the size and scale of Atlassian.
Companies looking to undertake repetitive M&A in the future can take heed of Atlassian's example by seeking to cultivate, for internal purposes, a more targeted and specific strategy for M&A, including developing a template term sheet like Atlassian's that is flexible enough to adapt to different types of acquisitions. This would also benefit by being informed by any industry-wide precedents, as discussed above. This will prompt your business to consider carefully its aims for M&A and risk profile and appetite, and enable you to better respond when the occasion does arise, regardless of whether you find yourself on the buy or sell side.