Deal Protections in Public M&A Deals

In public company merger transactions, the period between signing and closing involves a number of steps and potential challenges. The parties typically will negotiate certain contractual mechanisms into the merger agreement in order to ensure that both parties are working towards the closing of the merger and also to protect both parties from unforeseen changes in circumstances.

Such deal protection measures provide each party with the flexibility to respond to changes that may arise post-signing. The buyer may want to minimize the seller’s ability to walk away from the deal if a third-party offer comes along. At the same time, the buyer should also have the flexibility to respond if misrepresentations are discovered in the target company’s business after signing the merger agreement. The seller may want certainty that the deal will close, but may also want to preserve optionality in the event that a superior third-party offer comes along.

Public company merger agreements contain a wide variety of provisions intended to protect both parties between signing and closing. Some common deal protection devices in merger agreements include break-up fees, no-shop clauses, fiduciary out provisions, force-the-vote provisions, shareholder voting arrangements, information rights, and matching rights.

Break-Up Fees:

A break-up fee, also called a termination fee, is a deal protection mechanism that requires the target company to pay the buyer a fee if the target company terminates the merger agreement under certain circumstances. This most commonly occurs when the target company decides to accept a superior third-party bid.

A target company may be obligated to pay a “naked no-vote” termination fee if its shareholders fail to approve the merger transaction. In lieu of a fixed fee, some merger agreements have expense reimbursement provisions that require the target company to reimburse the buyer’s expenses up to a specified cap amount.

A reverse termination fee, which requires the buyer to pay the target company if the buyer cannot come up with the necessary financing to close the deal, is also sometimes negotiated into merger agreements.

No-Shop Clauses:

No-shop clauses prevent the target company from soliciting offers or negotiating with third party bidders. However, the no-shop clause will generally permit the seller to respond to unsolicited offers. This enables the target company’s directors to fulfill their fiduciary duties of seeking out the best available transaction for shareholders and maximizing value for shareholders.

In connection with a potential transaction, the target company may have entered into confidentiality agreements with third-party bidders. These confidentiality agreements may contain a standstill provision that prohibits the potential bidder from making an unsolicited offer or taking other unfriendly actions.

Fiduciary Out Provision:

A “fiduciary out” provision in a merger agreement enables the target company’s board of directors to change its recommendation with respect to the signed deal. If the board previously recommended that the target company’s shareholders vote in favor of the deal, the board can change its recommendation to accept a superior bid. Such a fiduciary out provision is typically subject to payment of a termination fee and may require other conditions to be fulfilled.

Force-the-Vote Provisions:

A “force-the-vote” provision in a merger agreement provides the target company’s shareholders the opportunity to vote on whether a third-party offer is more favorable than the current deal. If such a provision is included in a merger agreement, the target company’s board of directors must hold a shareholder vote on the proposed transaction. Since it takes time to make arrangements to hold a shareholder vote, a force-the-vote provision can deter third parties from submitting a competing bid.

Shareholder Voting Agreements:

In order to increase the certainty of the merger closing, a buyer may secure the commitments of significant shareholders of the target company to vote in favor of the deal. Concurrently with signing the merger agreement, certain significant shareholders of the target company may enter into a separate shareholder voting agreement with the buyer. Entering into such a support agreement can have a signaling effect to other shareholders and may discourage third parties from submitting competing bids.

Information and Matching Rights:

Information rights force the buyer to supply information to the target company about subsequent competing bids. The information rights provisions in the merger agreement will outline the specific information that the buyer must deliver.

If the target company receives an offer from a third party in the period between signing and closing, matching rights enable the buyer to adjust their offer to compete with the superior proposal. The duration of the matching rights can be heavily negotiated. The initial match period is often three to five business days. Some matching rights only allow the buyer to match the first competing bid, while other merger agreements draft the matching rights to allow the buyer to also match subsequent amended offers.

Crown Jewels:

A crown jewel lock-up refers to the buyer’s option to acquire key assets of the target company (the “crown jewels”), even if the contemplated merger transaction fails to close. This lock-up agreement gives the buyer assurance that it will be able to secure the crown jewel assets and can deter competing bidders.

Material Adverse Effect Clauses:

The passage of time between signing and closing opens the door to the possibility of events occurring that negatively impact the target company’s business. Material adverse effect (MAE) clauses, also referred to as material adverse change (MAC) clauses, provide protection to the buyer in the event that circumstances take a turn for the worse. MAE or MAC clauses can provide the buyer with the ability to refuse to close the transaction if a material adverse change is identified in the target company’s business. In practice, however, MAE clauses are rarely invoked.