Wednesday, December 8, 2010
The J. Crew deal is one where there will no doubt be some legal scrutiny, given the possible deficiencies in the process. Whether those challenges will succeed is of course an entirely different matter. The parties in that transaction included a "go-shop" provision. Presumably the go-shop can help paper over any deficiencies in the sales process. But how should we think about the effect of the go-shop when paired with a rather strong match right? Here's the match right as it appears in the J. Crew merger agreement:
Notwithstanding anything to the contrary herein, prior to the time the Company Stockholder Approval is obtained, but not after, the Board of Directors of the Company may change, qualify, withhold, withdraw or modify, or publicly propose to change, qualify, withhold, withdraw or modify, in a manner adverse to Parent, the Company Board Recommendation (“Change of Recommendation”) if the Board of Directors of the Company (acting upon recommendation of the Special Committee) has determined in good faith, after consultation its financial advisor and outside legal counsel, that failure to take such action could be inconsistent with the directors’ fiduciary duties under applicable Law; provided, however, that such action shall not be in response to a Superior Proposal (which is addressed under Section 5.2(e)) and prior to taking such action, (x) the Board of Directors of the Company has given Parent at least three calendar days’ prior written notice of its intention to take such action and a description of the reasons for taking such action, (y) the Company has negotiated, and has caused its Representatives to negotiate, in good faith with Parent during such notice period, to the extent Parent wishes to negotiate, to enable Parent to revise the terms of this Agreement, the Financing Letters, the Rollover Letter and the Guaranty in such a manner that would obviate the need for taking such action and (z) following the end of such notice period, the Board of Directors of the Company (acting upon recommendation of the Special Committee) shall have considered in good faith any revisions to this Agreement, the Financing Letters, the Rollover Letter and the Guaranty proposed in writing by Parent in a manner that would form a binding contract if accepted by the Company, and shall have determined in good faith, after consultation with its financial advisor and outside legal counsel, that failure to effect a Change of Recommendation could be inconsistent with the directors’ fiduciary duties under applicable Law.
It's a strong matching right - as opposed to simply an information right - because it includes an obligation to negotiate with the initial bidder before terminating the agreement. The match right ensures that the bidder will always have the last look and the right to match. In effect, the initial bidder will always the opportunity to take the agreement proferred up by a second bidder and sign on the dotted line. There is no circumstance under which the second bidder will be have to walk away with the seller unless the initial bidder has had a reasonable chance to meet the terms. There are pretty good reason to believe that this right can - in some circumstances - deter subsequent bidders from appearing. I've got a short piece on match rights that is appearing in the inaugural edition of the Harvard Business Law Review Online. In it I suggest that courts should not treat match rights as standard terms in merger agreements - as they have recently, but rather subject them to intermediate scrutiny.