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

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

Even with the recent slowdown in M&A activity, spin-offs have been among the transactions of choice in the past year. With everyone from economic mainstays like ConocoPhillips and Kraft to high-profile new players like TripAdvisor engaging in separation deals in the latest round of deconsolidation, it is an opportune time for dealmakers to consider the general implications of a spin-off on transformational corporate merger activity and certain structures that may allow for a combination of the two.

Corporations engage in spin-offs for a variety of business and financial reasons. A corporation’s goals can be accomplished without U.S. federal income tax to the distributing corporation and its stockholders so long as the transaction meets the requirements of Section 355 of the Internal Revenue Code.

Failure to meet these requirements either before or after the transaction can cause a spin-off to be taxable to the distributing parent company (in the form of corporate- level gain generally equal to the appreciated value of the spun-off subsidiary), to the distributing parent’s stockholders (in the form of dividend income equal to the value of the spun-off business), or both. These taxes can be prohibitively or even catastrophically expensive.

…continue reading: Spin-offs and Reverse Morris Trusts

Dealmakers working on public M&A transactions have recently seen increased focus on, and discussion of, what buyers and target boards “can” and “should” do in a sale context. Perhaps as a result of splashy headlines (such as the JCrew and Del Monte situations), market participants are more proactively asking what they need to be thinking about and doing in terms of process, terms and disclosure.

In a day of noteworthy production on September 30, VC Noble of the Delaware Chancery Court issued four significant opinions relating to M&A matters, three of which related to disputed public company transactions. Denying (1) a motion to dismiss post-closing shareholder claims in the infoGroup deal, (2) a motion for a preliminary injunction to block the OPENLANE transaction, and (3) a motion to expedite a preliminary injunction motion to block the AMAG acquisition of Allos, VC Noble offered broad-ranging insights into some of the key issues circulating in the market. While none of the views are necessarily groundbreaking and it is clear the decisions were largely driven by highly fact-specific elements, a quick review of some take-aways from these cases may prove useful as guidance for dealmakers.

…continue reading: Noble Prose: Sound Bites on Public M&A