October 13, 2010
Cogent - matching rights and termination fees
I just want to add a couple of things to Afra and The Deal Professor's posts on the recent In re Cogent opinion from Vice Chancellor Parsons. In addition to providing clarity on the question of top-up options, the opinion provides more data points in at least two other areas of interest. First, Vice Chancellor Parsons signs up to the "sucker's insurance" school with respect to matching rights in merger agreements. Here's the relevant portion of the opinion on the plaintiff's matching rights argument.
The first two items challenged by Plaintiffs are the no-shop provision and thematching rights provision, both of which are included in §6.8 of the Merger Agreement.The no-shop provision, according to Plaintiffs, impermissibly restricts the ability of the Board to consider any offers other than 3M’s. It also prohibits Cogent from providing nonpublic information to any prospective bidder. Similarly, Plaintiffs object to the matching rights provided for in the Merger Agreement, under which 3M has five days tomatch or exceed any offer the Board deems to be a Superior Proposal. Plaintiffs arguethat these two provisions, taken together, give potential buyers little incentive to engagewith the Cogent Board because they tilt the playing field heavily towards 3M. As a result, according to Plaintiffs, prospective bidders would not incur the costs involved withcompiling such a Superior Proposal because their chance of success would be too low.
After reviewing the arguments and relevant case law, I conclude Plaintiffs are not likely to succeed in showing that the no-shop and matching rights provisions are unreasonable either separately or in combination. Potential suitors often have a legitimate concern that they are being used merely to draw others into a bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is reasonable for a seller to provide a buyer some level of assurance that he will be given adequate opportunity to buy the seller, even if a higher bid later emerges.
I tend to disagree that providing a first bidder with strong matching rights along the lines of those in the Cogent merger agreement is going to be a strategy that will maximize value for shareholders (previous posts here). Will it encourage an initial bid where there otherwise might not be one? Probably, but that's a different story. If a seller is looking to generate initial bids there are other ways to do so that don't deter second bidders. Vice Chancellor Strine and now Vice Chancellor Parsons, I suppose, think the fact that matching rights are so common in merger agreements and the fact that we see the occasional jumped bid means that matching rights are not a deterrent to second bids. I don't think that's right, but let's let that sit for another day.
The second additional point interest in the Cogent opinion is the fact that Parsons gives dealmakers some guidance on calculating termination fees. In a few opinions, Vice Chancellor Strine has asked whether it might make sense to calculate termination fees as a percentage of enterprise value and not equity or deal value (In re Dollar Thrifty, In re Toys r Us and In re Netsmart). Vice Chancellor Parsons makes it pretty clear where he stands on this question. If you're going to be in his court, best to talk equity value when calculating termination fees. Plaintiffs argued that although the termination fee was only 3% when using equity or transaction value, it was 6.6% when calculated as percentage of the enterprise value. Parsons was happy relying on equity value in determining that the termination was not unreasonable.
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