Guest post by Paul Tiger of Freshfields Bruckhaus Deringer LLP
Delaware law does not necessarily require the board of a public company to canvas potentially interested bidders widely before agreeing to sell the company. In the context of a sale for cash or partial cash consideration, directors are only required to take reasonable steps to obtain the best price reasonably available; there is no single blueprint for directors to satisfy their duties in this respect.
As a result, potential bidders are sometimes caught off-guard by the announcement of a sale transaction by a public company. They may not have been contacted by the target or its advisors at all, or even if contacted, they may not have had an opportunity to rebid or submit their best and final.
Although interlopers generally have the deck stacked against them given the incumbent’s deal protections and the more public nature of any negotiations, for those interested in topping an announced deal, there are a number of considerations.
Finding the Roadmap
Although a broad market check is not necessarily required, directors of a public target do need to retain flexibility following signing to consider inbound interest. Directors will be expected to recommend the agreed transaction to their stockholders. In order to do so on an informed basis, they need the ability to share nonpublic information and negotiate with an interloper that submits a competing proposal – until such time as the stockholders approve the deal on the table. This flexibility is typically legislated in a “no-shop” provision that includes certain exceptions to the general restriction on solicitation of competing proposals, in order to permit directors to satisfy their fiduciary duties. The precise terms of these exceptions provide a roadmap for interlopers, including:
- How competing proposal and superior proposal are defined;
- The buyer’s information and notice rights if a competing proposal is submitted;
- The buyer’s matching rights, including the length of the notice period in subsequent rounds of bidding;
- Whether the target board can terminate the agreement outright to enter into an alternative agreement providing for a superior proposal (as is fairly typical) or merely change its recommendation to stockholders (which is more unusual);
- Whether the ‘no-shop’ provision has an initial ‘go-shop’ period permitting the target to approach potential interlopers; and
- The size of the break-up fee (both generally and in the event an interloper emerges during any initial ‘go-shop’ period).
Making your Bid Superior
Formulating the precise terms of the topping bid is a mix of art and science, best informed by key decision-makers and advisors, with the interloper having the advantage of knowing the terms of the announced deal and therefore having the opportunity to exploit the target’s and the incumbent’s respective pressure points. Although the interloper will generally be expected to agree to substantially the same form of merger agreement (with only necessary changes), it has two chief levers:
- Value. The typical definition of superior proposal requires the topping bid to be superior in value, after giving effect to any improved terms offered by the buyer pursuant to its matching rights. There is significant bid strategy to this. Does one only beat the deal on the table slightly to retain the ability to sweeten its deal later or does it come in over the top in a preemptive effort? How aggressive can the interloper be on price without upsetting its own investors (measured against a public failure to top/win)?
- Certainty. Most merger agreements require a superior proposal to provide certainty of closing – defined either by reference to an objective “reasonably capable of closing” standard or to match the certainty of the deal on the table. An interloper should consider its natural advantages relative to the announced buyer:
- Is the original buyer’s obligation to close conditioned on its financing banks funding under their debt commitments? Can the interloper agree to close without relying on a private-equity financing structure?
- Does the interloper naturally pose less regulatory clearance risk than the announced deal and/or is it willing to make greater commitments, including with respect to potential divestitures, in order to obtain required approvals? Interlopers should not expect targets to take incremental risk on regulatory clearances; as a result, an interloper may have to absorb significant contractual risk, with any required divestitures known and financially modeled in advance (particularly if needed to propose a “fix it first” solution to nettlesome regulators).
- Can the interloper structure its deal to avoid a stockholder vote of its own (or at least mitigate the risk of it by obtaining voting agreements from key stockholders)?
The interloper should understand that its proposal, even if unsuccessful, will have to be made public by the target’s board as part of its duty to inform its stockholders. In addition, the interloper should consider requiring that an enhanced termination fee would be payable by the target to the interloper if, after the interloper’s superior proposal successfully results in an agreement with the interloper, there is yet another successful topping bid (perhaps by the original buyer).
The layered complexity of these considerations, coupled with the game theory of bid strategy, makes it important for a potential interloper to consult with experienced advisors. Target directors will be obligated to consider any competing proposal on an informed basis, with due care. Accordingly, it’s essential for an interloper to put its best foot forward in a thoughtful, rational manner.
Freshfields Bruckhaus Deringer LLP
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Paul Tiger, Partner, New York
Paul M. Tiger advises on public and private M&A transactions and private equity investments.
He also counsels companies and their boards on stockholder activism, corporate governance, and fiduciary duty considerations. He has been recognized as a rising star for M&A by Law360, for M&A and activism by Legal 500, and for M&A by the IFLR 1000.