Appraisal, or dissenters’, rights, long an M&A afterthought, have recently attracted more attention from deal-makers as a result of a number of largely unrelated factors. By way of brief review, appraisal rights are a statutory remedy available to objecting stockholders in certain extraordinary transactions. While the details vary by state (often meaningfully), in Delaware the most common application is in a cash-out merger (including a back-end merger following a tender offer), where dissenting stockholders can petition the Chancery Court for an independent determination of the “fair value” of their stake as an alternative to accepting the offered deal price. The statute mandates that both the petitioning stockholder and the company comply with strict procedural requirements, and the process is usually expensive (often costing millions) and lengthy (often taking years). At the end of the proceedings, the court will determine the fair value of the subject shares (i.e., only those for which appraisal has been sought), with the awarded amount potentially being lower or higher than the deal price received by the balance of the stockholders.

While deal counsel have always addressed the theoretical applicability of appraisal rights where relevant, a number of developments in recent years have contributed to these rights becoming a potential new frontier in deal risk and litigation:

…continue reading: Appraisal Rights — The Next Frontier in Deal Litigation?

A record date, often viewed in the merger context as a mere mechanic to be quickly checked off a “to do” list, creates a frozen list of stockholders as of a specified date who are entitled to receive notice of, and to vote at, a stockholders’ meeting. A tactical approach to the timing of the record date can have strategic implications on the prospects for a deal’s success, while the failure to comply with the rules relating to setting a record date could cause a significant delay in holding the vote, leaving the door open for a topping bidder or dissident stockholder to emerge or gather support. As a result, it is important that dealmakers understand the basic mechanics and rules of setting a record date and the tactical repercussions of the record date construct.

Starting first with the legal requirements, there are several key inputs that inform the mechanics of setting a record date, including laws of the company’s state of incorporation, the company’s organizational documents, federal securities laws, rules of the applicable securities exchange and the relevant merger agreement. Taken together, these requirements dictate the necessary procedural and governance steps for setting the record date and establish the minimum and maximum time periods between the record date and the meeting, as well as between the board action setting the record date and the record date itself.

…continue reading: Setting the Record (Date) Straight

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company.

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:

…continue reading: Are All MOEs Created Equal?

The “crown jewel” lock-up, a staple of high-stakes dealmaking technology in the 1980s M&A boom, has been showing some signs of life in the contemporary deal landscape, albeit often in creative new forms. As traditionally conceived, a crown jewel lock-up is an agreement entered into between the target and buyer that gives the buyer an option to acquire key assets of the target (its “crown jewels”) separate and apart from the merger itself. In the event that the merger fails to close, including as a result of a topping bid, the original buyer retains the option to acquire those assets. By agreeing to sell some of the most valuable pieces of the target business to the initial buyer, the traditional crown jewel lock-up can serve as a significant deterrent to competing bidders and, in some circumstances, a poison pill of sorts.

Given the potentially preclusive nature of traditional crown jewel lock-ups, it is not surprising that they did not fare well when challenged in the Delaware courts in the late 1980s. As the Supreme Court opined in the seminal Revlon case, “[W]hile those lock-ups which draw bidders into a battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders detriment.” Building on the holding in Revlon, the court in Macmillan said that “Even if the lockup is permissible, when it involves ‘crown jewel’ assets careful board scrutiny attends the decision. When the intended effect is to end an active auction, at the very least the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession.” Although crown jewel lock-ups fell out of favor following these rulings, modern and modified versions of the traditional crown jewel lock-up have been finding their way back into the dealmakers’ toolkit.

…continue reading: Crown Jewels — Restoring the Luster to Creative Deal Lock-ups?

During the course of negotiations of every public company deal, inevitably the conversation will turn to the amount of the breakup fee payable by a target company to a buyer if the deal is terminated under certain circumstances. Because U.S. corporate law generally requires a target company to retain the ability to consider post-signing superior proposals, a breakup fee is an important element of the suite of deal protection devices (including “no-shop” restrictions, matching rights, etc.) that an initial buyer implements to seek to protect its position as the favored suitor. Speaking broadly, a breakup fee will increase the cost to a topping bidder as it will also need to cover the expense of the fee payable to the first buyer. However, with respect to deal protection terms in general, as well as the amount of breakup fees in particular, courts have indicated that they cannot be so tight or so large as to be preclusive of a true superior proposal. Starting from this somewhat ambiguous principle, the negotiations therefore turn to the appropriate amount for the breakup fee given the particular circumstances of the deal at hand.

…continue reading: Breakup Fees — Picking Your Number

We have written before of certain pitfalls that await dealmakers utilizing earnouts and purchase price adjustments. An oft-shared aspect of those two deal provisions was the subject of a recent Delaware decision by Chancellor Strine — the employment of an independent accountant to resolve post-closing disputes between the parties. The outcome, while hardly surprising, offers some timely reminders of some of the hazards presented by this popular dispute resolution mechanism.

The case arose from Viacom’s 2006 purchase of Harmonix, the maker of the Guitar Hero and Rock Band video games. A substantial portion of the consideration was in the form of a contingent earnout based on a multiple of “gross profit” for the acquired business for the two years following closing. Following a dispute relating to the 2008 earnout, the parties, per the merger agreement, submitted the disagreement to an independent accountant for review. The accountant decided in favor of the sellers awarding them $239 million, and Viacom sought court review of the decision. Chancellor Strine’s opinion largely focused on two key issues:

…continue reading: Dispute Resolution for Earnouts and Purchase Price Adjustments

Much attention deservedly has been focused on the recent Delaware Chancery and Supreme Court decisions in the high-profile Vulcan/Martin Marietta case where the courts found that a “use restriction” in a confidentiality agreement (i.e., a provision that limits the recipient’s “use” of the disclosing party’s confidential information to a specified purpose) could in certain circumstances preclude the recipient from later commencing a hostile offer for a target company even absent an explicit standstill. A recent decision by Judge Rakoff in the Southern District of New York refusing the defendant’s motion to dismiss shows that “use restrictions” may also limit the ability of a recipient party to pursue an alternative opportunity after receiving confidential information under a non-disclosure agreement (NDA).

In the New York case (which at these preliminary stages accepts as true the factual allegations of the plaintiffs), a private equity investor signed an NDA with a broker/advisory firm that was seeking financing for a corporate client to implement a business idea in the cash management industry. The NDA stated that the PE firm would only use the confidential information shared by the broker to explore a potential business transaction involving the broker and the broker’s client. After actively considering a number of transaction opportunities with the broker and its client, the broker asserted that the investor later pursued and completed an acquisition of one of the potential targets allegedly identified by the broker without including the broker and its client.

…continue reading: NDA Use Restrictions — Use With Caution

Delaware courts often take an expansive approach to decision-making, offering detailed commentary on the facts and the underlying law in many key M&A cases. While these lengthy opinions can offer market participants useful insights into best practices for future deals, it is equally important that dealmakers not overreact to observations that should, and no doubt are intended to, be read within the context of the specific circumstances before the court. In seeking guidance from court decisions, readers should be mindful that, more often than not, it is only the cases with the worst, or at least most complicated, facts that make it to a final court decision, exacerbating the risk reflected in the old legal adage that “hard cases make bad law”. A few examples may be useful.

Stapled Financing In his 2005 Toys “R” Us, Inc. decision, then VC Strine was critical of the decision to allow one of the target board’s financial advisers to offer financing to the winning bidder after the merger agreement was signed. Some commentators interpreted the court’s comments as blanket discouragement of the practice of “stapled financing” being offered to bidders by a target adviser. However, VC Strine himself later publicly commented that such a reading “misconstrued” his opinion and that there were situations where it would be appropriate for a seller, through its banker, to offer financing to potential bidders (for example, in order to stimulate interest among buyers, to reduce the risk of leaks or to set a valuation floor for an auction). His criticism in Toys was directed at the risk of appearance of conflict generated by the request of the adviser (and agreement by the board) to offer financing once the deal was already signed, meaning the financing role served to only generate fees for the lending bank as opposed to any useful function for the target. A similar nuanced reading is required of VC Laster’s recent commentary on stapled financing that played a significant role in the fairly scathing Del Monte decision. Rather than suggesting that stapled financing is per se problematic, VC Laster implied that the court will seek evidence that allowing a sell-side adviser to offer a buyer financing had “some justification reasonably relating to advancing stockholder interests”. Instead of the reflexive avoidance of stapled financing that occurred in the aftermath of each of these two decisions, a more refined reaction requires principals and their advisers to critically assess whether such financing could in fact advance the target’s interests and, if such financing is in fact offered, to ensure that it is done with the full knowledge of the board with appropriate protections in place to address any resulting potential conflicts (e.g., by early engagement of a second, non-financing adviser).

…continue reading: Delaware Decisions: Data Points, Not Doctrine

Whether or not to acquire a minority or “toehold” stake in a public company as a preliminary step towards a future business combination has been the subject of tactical debate for many years. Proponents argue that a toehold can be used by a potential bidder to convey its serious intent or, if necessary, as a platform to quietly or publicly put the target in play. In addition, the position could advantage a buyer in a subsequent sale process by reducing its average cost (by acquiring shares before a deal premium attaches) or acquiring a meaningful voting position in the target; at the very least, the profit on the toehold that the acquirer can collect if another buyer succeeds with a higher bid may cover, or exceed, the costs the acquirer incurs in pursuing the target. On the flip side, demurrers point out the risk of being perceived as employing strong-arm tactics when a velvet glove approach is more likely to win over the “hearts and minds” of the target. Moreover, many a target board may reflexively react in an unduly defensive manner, for example by enacting a poison pill, complicating an attempt to reach a negotiated outcome at a desirable price.

The debate has recently sharpened with comments from at least one Delaware judge who has taken the view that the failure to acquire a stake before approaching a target conveys a lack of seriousness about making a potential bid and is evidence of being a “stupid acquirer.” A small stake (even as little as 100 shares) in a potential target represents a low-cost option for better positioning the acquirer in the event of litigation if a sale process does not unfold in the way the buyer would like (e.g., the target board refuses to engage with the buyer or agrees to a sale to another buyer). Only by owning a stake will the buyer have “standing” as a shareholder of the target to bring legal claims against the target or its board, a need that may not become apparent until it is too late to rectify.

…continue reading: “Toehold” Stakes in Target Firms

Regardless of the state of the deal market, Material Adverse Effect, or MAE/MAC, provisions remain among the most hotly contested negotiating points for dealmakers. Contemporary purchase and merger agreements almost invariably contain some form of an MAE, defined generally as events or changes that have (or, in some cases, would or could reasonably be expected to have) a material adverse effect on the target company, subject to negotiated exceptions. MAE clauses typically serve two main purposes — they are used to qualify representations and warranties (and in some cases, covenants), and act as a condition to closing for the benefit of the buyer (i.e., the buyer is not required to close if the target has suffered an MAE between signing and closing).

…continue reading: Custom-Made Material Adverse Effect Provisions