Merger and acquisition (M&A) transactions may be conducted using a variety of techniques. One common method is conducting an auction process that is intended to facilitate a competitive bidding process among several bidders. Another method involves a market check, which entails the seller evaluating the interest levels of potential buyers in the absence of a formal bidding process.

The company’s management and board of directors have the flexibility to use an M&A process that they deem appropriate. As the Delaware Supreme Court has stated, there is “no single blueprint” that directors must follow for selling a company. The directors should be focused on conducting an M&A process that is likely to achieve the best price for shareholders in light of the circumstances.

Auction Process

The M&A auction process usually involves several rounds of competitive bidding. The investment bank hired by the seller provides prospective buyers with a confidential information memorandum. In certain circumstances, the investment bank may just provide a short “teaser” in lieu of a lengthier confidential information memorandum. The potential acquirors are given a fixed deadline to respond with a bid.

Prior to the bid deadline, the selling company may circulate a draft merger agreement and related disclosure schedules to the potential bidders. The company may have different forms of the merger agreement that it will circulate to different bidders depending on whether they are a strategic buyer or a financial acquiror such as a private equity firm. The differences in the form agreements often relate to the financing provisions.

It is often inevitable in an auction process that rumors about the contemplated M&A deal will be publicly leaked. The dissemination of information to a large number of bidders in an auction process heightens the risk of publicity. As a result, companies may choose to conduct a more limited “mini-auction” process to only invite participation from likely bidders.

In subsequent rounds of bidding, the company may provide the bidders with more sensitive confidential information. An auction process can be advantageous because the prospective acquirors have no visibility into how many other bidders are left in the process.

Market Check

In certain situations, a market check may be preferable to conducting a formal bidding process. This may be the case if the seller concludes that an auction process is unlikely to result in additional serious bidders. A market check may also be preferable in order to minimize the risk of public leaks. Market checks can occur before or after the signing of an M&A deal. Market checks can also be active or passive.

In a pre-signing market check, the investment bank representing the selling company may approach certain companies to gauge their interest levels in an acquisition. A pre-signing market check may also be unsolicited when potential acquirors privately approach the company to indicate potential interest in an acquisition.

A post-signing market check enables other potential acquirors to make bids after the execution of a definitive merger agreement. Post-signing market checks can be categorized as active or passive.

The merger agreement in an active market check contains a “go-shop provision.” This permits the seller to actively solicit alternative bidders. The merger agreement in a passive market check contains a “no-shop provision.” This prohibits the selling company from actively seeking out new bidders, but allows the board of directors to consider unsolicited bids. If the board of directors conclude that the new unsolicited bid provides better value to shareholders, it can change its recommendation or terminate the merger agreement with the initial bidder in order to execute an agreement with the new bidder.