Article Reviews

M&A Agreement Basics

There is a very nice three-parter on M&A agreements at the WSJ’s Deal Blog. You can find part 1 here, part 2 here, and part 3 here. I’d just like to summarise some key points below.

Four articles that define the rights of a party to avoid closing and walk away (mainly for the benefit of the buyer):

  1. Conditions
    • Regulatory requirements need to be met.
    • Representations and warranties (“reps”) need to be true in all material respects both at signing and closing.
    • There cannot have been a material adverse change (MAC) in the business.
  2. Representations and warranties
    • Specify the reps and which ones are qualified by materiality (i.e. if it is just a little not true, it is not a breach).
  3. Covenants
    • Restrictions on how the business of the target is operated between signing and closing.
  4. Termination
    • Breach by the other party
    • Failure to obtain required shareholder or regulatory approval
    • Conditions cannot be satisfied by a specified “drop dead” date.
    • Right to terminate the deal if a better offer comes along

Common ‘deal protection’ that a buyer gets (protect the deal against other potential bidders):

  1. No-shop and fiduciary out
    • Sellers must stop soliciting competing bids.
    • However if a board of directors receives an unsolicited competing proposal that could be a ‘superior’ proposal, the directors can discuss and provide information to the competing bidder (else they will be violating their fiduciary duty).
  2. Termination rights
    • The target company has the right to terminate the original merger agreement if it wants to accept a superior proposal.
  3. Topping rights
    • The target company must give the initial buyer several days advance notice so that the initial buyer has an opportunity to renegotiate, in the event it wants to exercise its termination rights.
  4. Break-up fees
    • The initial buyer gets a break-up fee in event of termination. Based on case law, the break-up fee is 3-4% of the purchase price (enterprise value), plus reimbursement of expenses.
  5. Go-Shop
    • If there is an impasse over the price and/or deal protection package, the initial buyer and the seller can agree to first sign a merger agreement that has less deal protection for the buyer (compared to what the buyer wants), after which the seller goes to solicit competing bids publicly. If the seller cannot find a better deal in 30 days, the deal protection package that the buyer originally wanted, will be imposed.

Reverse termination fee

  1. Opposite of the break-up fee. Paid by the buyer to the seller if the buyer does not complete the transaction at no fault of the seller.
  2. Typically 7% of the purchase price (KKR/Del Monte, TPG/J. Crew). It is higher than the breakup fee because target companies are worse off than buyers (e.g. employees quit or are looking around, risk arbs pressure the company to sell to someone, etc.)
  3. Private equity buyers typically form a shell company to be the legal buyer, so that they do not risk their entire balance sheet in the event the seller goes to the courts to force the buyer to consummate the transaction.

Sample merger agreements

  1. Hertz/Dollar thrifty merger agreement
  2. Blackstone/Dynegy

Basic terminology

  1. Poison pill – Board approval is required for someone to cross an ownership threshold (e.g. 15% of shares outstanding). This allows the board to prevent takeover attempts.


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