Mergers

1
Mergers Acquisitions Negotiating and Closing
the Transactions

• Professor Jack Williams

2
Directors Duties

• Preliminary negotiations
• Duties during negotiations
• Merger agreements and letters of intent
• Deal protection measures
• Material adverse change clauses

3
Preliminary Negotiations

• Role of BOD
• Fiduciary duties
• Care
• Loyalty
• Obedience
• Business Judgment Rule
• Protect decisions from informed disinterested
  directors who act in good faith

4
Preliminary Merger Negotiations

• Extent of duty to disclose preliminary merger
  negotiations Public Co.
• No duty to disclose
• Extent of duty to respond Public Co.
• Old rule Price and structure of the merger
• New rule Ad hoc No comment response

5
Duties During Negotiations

• Duty in making or assessing a merger proposal
• Delaware employs three tests
• Business Judgment Test Van Gorkom Test
• Enhanced Scrutiny Test Unocal and Revlon Test
• Intrinsic Fairness Test Mills Acquisition Test

6
Business Judgment Test

• Protect decisions from informed disinterested
  directors who act in good faith
• Informed
• Disinterested
• Good faith
• Absent all elements, court employs intrinsic
  fairness test

7
Van Gorkom Rules

• Application of BJR to decision to sell
• Court found that selling board did not make
  informed decision (gross negligence)
• Short notice
• Quick meeting
• Brief oral introduction by target CEO
• Court found that s/hs were not informed

8
Van Gorkom Changes to Selling Company Procedures

• Requirement of fairness opinion from independent
  investment bankers on price offered
• Lengthy and detailed meeting with both internal
  and external experts

9
Board v. Shareholders

• BOD negotiations merger agreement
• S/hs have no power to initiate merger
• S/hs have no power to amend or veto specific
  provisions
• S/hs approve or disapprove merger agreement as
  whole

10
Merger Agreements and Letters of Intent

• Negotiation through both oral and written
  agreements
• Letters of intent
• No shop provisions
• Plan of Merger is the operative document
• Adopted by BOD
• Approved by s/hs

11
United Acquisition Corp.

• Contract is a matter of mutual intent
• Can require that any agreement must be in writing
• Partial performance may save the agreement if
  accepted

12
Stock Purchase Agreement

• Complete and correct financials
• No new issuance of securities, debt, etc.
• No incurrence of new liabilities other than
  current liabilities
• No sales of IP
• No casualty losses
• No material changes in employee compensation

13
Stock Purchase Agreement (contd)

• Good and marketable title to assets
• Tax compliance
• No material changes
• No employment contracts
• No duty to contribute to multi-employer
  retirement plan
• No material contracts above XXXX
• Compliance with all laws

14
California Natural

• C/A Breach of contract, promissory estoppel
  ,and fraud
• Jurisdiction Diversity
• Remedy Injunction
• Procedural Posture Cross-MSJ

15
California Natural contd

• Issue is whether the differences were such that
  they amounted to mere formalities or to pre-reqs

16
Asset Purchase Agreement

• Price
• Audit
• Earn outs
• Transaction fees
• Typical clauses
• Typical resolutions

17
Deal Protection Measures

• Termination, walk-away or break up fees
• Liquidation damages or punitive
• 4 generally acceptable
• Topping fees
• Secure protection for lost opportunity cost and
  due diligence expenses
• No shop and no talk
• Lock ups
• Lock outs
• Fiduciary outs

18
Material Adverse Change Clauses

• Parties may walk away from the deal if there is a
  drastic change in circumstances between the
  agreement and the closing of the deal
• Facts and circumstances
• Cyclical or volatile business factors
• Waiver

19
Conclusion