Home > Corporate Governance Theory, Directors`duties > Mergers and Acquisitions and how directors comply with their duties.

Mergers and Acquisitions and how directors comply with their duties.

Deal protection provisions are among the most negotiated terms in a transaction, as a result of the interest of sellers to prevent new bidders to interfere with their offers, given the effort and resources dedicated to it until the signing day.

 

Sellers would be interested in letting the window open, both because of a higher price perspective, and because under certain jurisdictions, (such as Delaware), those provisions can`t be so onerous that a higher bidder is precluded from appearing.

 

The options for a target board are, (or have been in the past):

 

–         No talk provision: it prohibits the board to respond even to unsolicited higher bids. In was dropped in Delaware in 1999 by a sample of court decisions.

–         No shop provision: it allows the board to respond to any unsolicited offer potentially leading to a higher price. Those provisions, (break-up fees, matching rights, fiduciary termination rights, force-the-vote provisions, change of recommendation, etc.) protect the bidder and let directors fulfill their duties. Those provisions are to be judged as a whole, and different business circumstances in each particular case need to be considered. Since 2007, the fact that the number of transactions has declined, has led the balance more in favor of bidders that in favor of sellers, although reasonableness remains the criterium to follow.

–         Go shop provision: it gained momentum in the 2006-2008 period, and was a balance between the need for a quick deal and the recognition that a post-signing market check is to be done in order for directors to fulfill their (Revlon) duties to pursue the shareholders best interest. The provisions, although tightly fixed, have been adapted in recent times, (Websense and BMC cases), so that

  • In some cases (Websense) the rule is a no-shop, with a go-shop limited to certain bidders who were already active before the announcement. These bidders qualify for a low fee, provided they act in certain limited delays.
  • In other cases (BMC) the rule is a go-shop but excluding from the low break-up fee those bidders already present and analyzing the transaction before the announcement.

Basically, as Mr. Wolf from Kirkland states, “there is room for creativity to tailor market terms to the real-world circumstances of a particular transaction, which is precisely what courts expect boards and their advisors to do.

 

–         Hybrid go shop provisions: in the realm of LBO/MBO in the period 2006-2008, generally with a single financial sponsor, some doubts emerged as for the no-shop provision adequacy for the target boards fiduciary duties; when there was a lonely bidder until signing or announcement, (whether a private equity firm or strategic or industrial purchaser), there was a big concern about the no-shop really discharging directors` fiduciary duties, so that in those cases the go-shop dominated the arena. In certain cases, though, a hybrid solutions appeared, as in Pfizer/Wyeth, Hewitt/Aon and Pfizer/King. It did not include the marketing period, but it let the reduced break-up fee for unsolicited offers if appearing in a month (or so) after the announcement. The solution avoids management distraction from business in the competing offer search period, but still keeps the market-check after the announcement, which itself acts as a call for interested bidders. And the reduced fee works in favor or directors duties`compliance.

 

Apart from deciding on the procedure, a board needs to consider other facts, such as:

 

–         The case that managers might have change in control provisions, so that they could have a conflict of interest,

–         The case that any manager or director might have a relationship with any bidder,

–         The fact that not all offers need to be presented in the same terms, for the same assets, etc., so that the evaluation of alternatives by board must be thoroughly weighted

 

This may remain as a general recommendation: every step, whatever decision standard is followed, needs to be dealt very carefully.

 

Based on several Harvard Law School Forum on Corporate Governance and Financial Regulation:

 

–         Deal Protection — One Size Does Not Fit All, by David Fox from Kirkland & Ellis, November 28, 2009

–         Test-Driving a Hybrid Go-Shop, by David Fox from Kirkland & Ellis, November 28,2010.

–         Custom (Go-)Shopping, by Daniel E. Wolf, from Kirkland & Ellis, June 21, 2013

–         From Vigilance to Vision, by Jennifer Mailander, Corporation Service Company, May 29, 2013.

 

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