April 13, 2017
Practical Law has published its fourth annual survey of deal-protection measures in public M&A deals. In this study we analyze the provisions that parties negotiate to balance a buyer’s desire for deal certainty with a target company board’s need remain open to changing its merger recommendation in order to satisfy its fiduciary duties. Unique among the existing literature and surveys of deal-protection provisions, the Practical Law study examines how various deal characteristics—including buyer type, form of consideration, deal size, and financing—affect the negotiations and ultimate agreement between the transaction parties on deal protections.
The study sample consists of merger agreements signed in 2016 for acquisitions of US reporting companies (excluding REITs and debt-only issuers) in deals with equity value at signing of $100 million or more, excluding certain parent/subsidiary and inversion transactions. Based on these parameters, the survey sample for this year’s study consisted of 181 public merger agreements.
This year’s study comes at an inflection point in M&A dealmaking. The Delaware Supreme Court’s seminal 2015 decision in Corwin v. KKR heralded a new era of Delaware M&A jurisprudence, in which the court confirmed that the affirmative, uncoerced vote of the fully informed, disinterested stockholders in favor of a merger transaction restores the presumptions of the business judgment rule in favor of the target company’s board of directors (125 A.3d 304, 308 (Del. 2015)). Subsequent rulings in 2016 and 2017 added that the cleansing effect described in Corwin applies equally to transactions structured as front-end tender offers (see Lax v. Goldman, Sachs & Co., 2017 WL 563187 (Del. Feb. 9, 2017)). The Delaware Supreme Court also held that the standard for director liability after the stockholder vote is waste—a standard that as a practical matter means dismissal of typical Revlon claims (see Singh v. Attenborough, 137 A.3d 151 (Del. 2016)). This year’s study provides an initial snapshot of how practitioners have begun responding to the Delaware judiciary’s increased deference toward director decision-making in M&A.
Although the study is focused primarily on the deal-protection provisions binding target companies, we also review the deal protections negotiated by buyers who require their own stockholder approval prior to closing the merger. This analysis has two goals: to learn how frequently those buyers agree to symmetrical deal-protection measures, and to determine how reciprocally binding covenants and remedies affect the deal protections agreed to by the target company.
The study finds some small hints that, post-Corwin, parties to public merger deals are foregoing some of the more creative provisions that aim to encourage third-party bids. Innovations of the recent past—such as two-tier break-up fees in deals without go-shop rights and limitations on buyers’ matching rights when a competing bid is substantially superior—were absent in 2016, possibly evidencing a burgeoning willingness by buyers to insist on tighter deal protections. At the same time, however, the architecture of the typical public merger agreement has yet to undergo significant change. Provisions such as standstill waivers, fiduciary outs for intervening events, and termination rights for superior proposals have become even more common than they had been in the past, while break-up fee amounts have not substantially risen from their typical range. Time will tell whether the recent changes in Delaware law will eventually bring material change to merger agreement negotiations.
For access to the full study, see Deal Protections and Remedies: A Study of Public Merger Agreements in 2016.
In conjunction with the publication of the study, Practical Law is hosting a complimentary 60-minute webinar on Wednesday, April 26, 2017, at 1:00 p.m. ET in which Daniel Rubin, Senior Legal Editor, Practical Law Corporate and M&A, will review the study’s major findings. CLE credit is available in New York and many other states. Register for the webinar here.