M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, August 7, 2020

Prejudiced in the extreme...

OK, the summer, if you can call being locked in one's home since March the "summer", is winding down and I'm starting to think about the school year again. Just in time for that, there's another of Rick Climan and Keith Flaum really useful cartoons. This one about negotiating 10b-5 reps. These cartoons are really helpful, especially for junior associates looking to master the merger agreement. And, they're entertaining in an M&A geek kind of way. Links to the entire collection of cartoons to date is at the bottom of this post.

-bjmq

 

Earlier M&A Cartoons here:

August 7, 2020 in Merger Agreements | Permalink | Comments (0)

Tuesday, June 25, 2019

Residuals Clauses in NDAs

Another in a series of very helpful cartoons from our friends at the Hogan Lovells M&A team on the use of 'residuals' clauses in nondisclosure agreements. The explanation of how they work here is very clear. Residuals clauses are just one of those things sellers may have to live with.

    

-bjmq

 

Earlier M&A Cartoons here:

June 25, 2019 in Merger Agreements | Permalink | Comments (0)

Wednesday, June 15, 2016

Evolution of Merger Agreements

Anderson and Manns have posted a draft of a paper they presented at this year's AALS Transactional Law panel in NYC, The Inefficient Evolution of Merger Agreements. This paper is one of a couple of recent papers conducting empirical analyses of merger agreements. It's well worth a read!

Abstract: Transactional law is one of the most economically significant areas of legal practice and accounts for a large percentage of the profits and staffing at most elite law firms. But in spite of its economic importance, there has been almost no empirical work on the legal drafting process and the evolution of transactional documents over time. We have sought to fill this gap by analyzing the evolution of public company merger agreements in a dataset that encompasses 12,000 merger agreements over a 20-year period. Using computer textual analysis, we are able to identify the precedent, an earlier merger agreement, which serves as the template for the drafting of each deal. This approach allows us to construct comprehensive “family trees” of merger agreements, which we use to show how agreements are created and how they change over time.

We use this innovative approach to explore whether transactional drafting is driven by a rational process that minimizes the cost of deal documentation and risk to clients or by an ad hoc process that increases billable hours and risk. We show that a high level of “editorial churning,” ad hoc edits that appear to be cosmetic rather than substantive, takes place in legal drafting. Over half of the text of merger agreements is routinely rewritten during the drafting process even though the substantive provisions of merger agreements have similar features. Significant variation exists among merger agreements even involving the same firm as there is no evidence of firm-specific templates or industry-specific templates in most cases. Lawyers appear to choose earlier merger agreements as deal templates based on familiarity with past deals rather than based on the economic needs of clients or cost mitigation. Our empirical findings provide strong evidence of significant (structural) inefficiency in the drafting process which raises costs and risk to clients.

We argue that this inefficiency calls for an industry-wide solution of creating standardized templates for merger agreements that could be used across firms. The use of standardized documentation would help to minimize the time consuming (and expensive) drafting process of lawyer- and firm-specific edits that do little, if anything, to protect clients or affect the substance of the transaction. Furthermore, deal term standardization would have positive externalities as judicial opinions crystalize the meaning of standardized text. In addition, our analysis suggests that, somewhat counterintuitively, the failure to standardize text actually may stifle true innovation in the transactional context. We argue that by establishing an industry-wide set of “base documents,” lawyers could create the technological platform on which to create truly innovative solutions for clients at lower cost. While lawyers may not have the self-interest to embrace a standardized set of documents on their own, we argue that repeat-player private equity firms or trade associations for the private equity industry may have the economic interest and leverage to push for greater standardization.

-bjmq

June 15, 2016 in Merger Agreements | Permalink | Comments (2)

Tuesday, June 24, 2014

Negotiating waivers of consequential damages

Now we have another in the series of videos from Rick Climan and Keith Flaum at Weil in which  they negotiate provisions of a merger agreement before an audience - with some animation to keep you engaged.  This series is really interesting and - especially for young associates - worth every minute of time you spend with it.  This latest video revisits the issue of indemnification and damages that the pair discussed in an earlier video (Rube Goldberg).  In this video they discuss negotiating waivers of consequential damages. 

 The case on consequential damages that Keith refers to in the video is Biotronik v Conor Medsystems Ireland.

-bjmq

June 24, 2014 in Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Friday, May 16, 2014

Go-Shops and the pricing of going private transactions

Antoniades, et al have a paper, No Free Shop.  There have always been two sides to the g0-shop issue.  On the one side, if a company has the right to proactively shop itself post-signing, that should be good, right? In Topps, Chief Justice Strine called the go-shop "sucker's insurance".   Generally, employing a go-shop provision is one of several ways that a board can, in good faith, reassure itself that it has received the highest price reasonably available in a sale of control. 

On the other hand, when one looks at the way go-shops are actually deployed, one wonders what is going on.  By now, they are regularly included in merger agreements with private equity buyers and rarely included in merger agreements with strategic buyers.  If you believe that private equity buyers have characteristics of a common value buyers and strategic buyers are more like private value buyers, then the go-shop takes on a different, less appealing light. 

The paper from Antoniades, et al backs up this view;  go-shops are associated with lower initial prices and fewer competing offers.  These results raise the question whether boards can reasonably rely on the go-shop to confirm valuations.  Here's the abstract:

Abstract: We study the decisions by targets in private equity and MBO transactions whether to actively 'shop' executed merger agreements prior to shareholder approval. Specifically, targets can negotiate for a 'go-shop' clause, which permits the solicitation of offers from other would-be acquirors during the 'go-shop' window and, in certain circumstances, lowers the termination fee paid by the target in the event of a competing bid. We find that the decision to retain the option to shop is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. We find that go-shops are not a free option; they result in a lower initial acquisition premium and that reduction is not offset by gains associated with new competing offers. The over-use of go-shops reflects excessive concerns about litigation risks, possibly resulting from lawyers' conflicts of interest in advising targets.

Guhan Subramanian's 2007 Business Lawyer paper, Go-Shops v No-Shops, came to a different conclusion with respect to the utility of go-shops.

-bjmq

May 16, 2014 in Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity | Permalink | Comments (0) | TrackBack (0)

Thursday, May 15, 2014

A controversial customary MAE Carveout

Students in my just completed M&A class will enjoy Rick Climan's latest installment of this series of mock negotiations with Keith Flaum.  This one on a potentially controversial customary carveout to the MAE.  

 The lesson -- even though everyone is including it, doesn't mean you have to!

-bjmq

May 15, 2014 in Material Adverse Change Clauses, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 10, 2013

Basics of Acquisition Agreements MOOC

LawMeets, in conjunction with the ALI, is putting on its Basics of Acquisitions Agreements MOOC for the second time.  Registration is open now -- here. Here's an overview of the course:

This course is an overview of how acquisition agreements work. It will provide aspiring and practicing deal lawyers with an understanding of the deal process and their role in it.

The course will have four modules. Each module includes video lectures and a LawMeet® - an interactive exercise that involves posting a video response to a real world problem presented by a client or partner, followed by peer and expert review. Click here to see how a LawMeet® works. The first module will be available no later than September 9, 2013.

Students of mine who took this course last year thought it was great.  If you are taking an M&A class now, or if you plan on taking an M&A class in the Spring, this MOOC would be a valuable addition.

-bjmq

September 10, 2013 in Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Friday, May 31, 2013

Rube Goldberg and the indemnification provision

I received a couple of emails from readers who enjoyed the previous youtube clip of highlighting issues related to sandbagging (Like the cat that ate the canary) in merger agreements.  Now, here's another one - consider it free/fun CLE (especially you summer associates!) in which Rick Climan and Keith Flaum walk us through unexpected issues in indemnification provisions.  

More specifically, the topic for this clip is the question of whether there should be indemnification for any direct or indirect damages that relate from any direct or indirect breach of any representation or warranty.  Hmmm.  Word to the wise associate - don't fall for it.  Why?  Here's the Rube Goldberg hypothetical to explain why:

 

-bjmq

May 31, 2013 in Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 24, 2013

Signaling and risk allocation in merger agreements

Macia and Moeller of TCU have posted their paper, Signaling and Risk Allocation in Merger Agreements. They argue that targets use firm specific MAC carveouts to signal their unobservable quality.  By declining to include firm specific MAC carveouts (e.g. carveouts relating to restatements or CEO retention, etc), high quality firms are able to create a separation from low quality firms that tend to include more firm specific MAC carveouts.  It's an interesting paper.  I will ignore (not really) their subtle finance dig:

[T]here are only few rigorous academic studies about MAC clauses, arguably because of a lack of readily available data. Instead, MAC clauses have been almost exclusively studied by practitioners and legal scholars.

Ahem...ok, temper in check. Here's the abstract:

Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions [bjmq: e.g. carveouts]. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.

-bjmq

 

 


																	
									
									

April 24, 2013 in Material Adverse Change Clauses, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 26, 2013

Gibson Dunn's 2012 Survey on No-Shops & Fiduciary Out Provisions

In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more.  Among other things, they have compiled data relating to

  • a target’s ability to negotiate with an alternative bidder,
  • the requirements to be met before a target board can change its recommendation,
  • each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
  • the consequences of such a termination. 

MAW

February 26, 2013 in Break Fees, Contracts, Deals, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.

MAW

December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 6, 2012

Disclosure and value creation ... or not

Two interesting papers that raise the question of the true value of disclosure.  The first is by Steven Davidoff and Claire Hill, Limits of Disclosure.  Disclosure has been a common regulatory device since it was by Louis Brandeis ("Sunlight is said to be the best of disinfectants", Other People's Money).  Indeed, our system of securities regulation is built upon this premise.  Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retial investors and in regulation of executive compensation.  They come away disappointed:

The two examples, taken together, serve to elucidate our broader point: underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete. This does not argue for making considerably less use of disclosure. But it does sound some cautionary notes. The strong allure of the disclosure solution is unfortunate, although perhaps unavoidable. The admittedly nebulous bottom line is this: disclosure is too often a convenient path for policymakers and many others looking to take action and hold onto comforting beliefs in the face of a bad outcome. Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.

In another paper, Jeffrey Manns and Robert Anderson, The Merger Agreement Myth, take on the question of whether M&A lawyers are really creating any value or if they are just haggling over nits that no one cares about.  Manns and Anderson conduct an event study to figure out whether there is value to all that drafting.  They take advantage of the fact that not all merger agreements are filed with the SEC on the same day they are announced.  So, they look for stock price changes that they can attribute to the addition of new information after the market learns about the terms of the merger agreement.  If lawyers add value, they hypothesize that prices should rise after the market has learned the terms of the agreement - that's the value attributable to lawyers.  It's basically a disclosure argument.  If disclosure works, then the market should be able to instantly - or reasonably quickly - absorb new information and have that information reflected in stock prices.  Like Davidoff and Hill, Manns and Anderson come away disappointed: 

Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.

So, disclosure as a regulatory device, or as a determiner of value, is not that successful and suggests we start looking elsewhere.

-bjmq

 

November 6, 2012 in Executive Compensation, Federal Securities Laws, Merger Agreements, SEC | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 11, 2012

Basics of Acquisition Agreements

Our friends at LawMeets and Apprennet LLC are doing some interesting programming that should be of interest to law students and junior associates who might be just getting going.  They are announcing “The Basics of Acquisition Agreements”.  Faculty include our own Afra Afsharipour!  See below.

-bjmq

 

The Basics of Acquisition Agreements

LawMeets is launching the first “MOOC” or massive open online course to teach transactional lawyering skills.  LawMeets two-week online course on the Basics of Acquisition Agreements includes four video lectures, four interactive learning exercises and two panel discussions by leading transactional attorneys moderated by LawMeets faculty. The course is free and open to everyone.

WHO will teach the course?

The LawMeets® faculty for this course include:

  • Afra Afsharipour, Professor of Law at UC Davis School of Law and former attorney at Davis, Polk & Wardwell LLP
  • Jay Finkelstein, DLA Piper Partner and Adjunct Professor of Law at Stanford Law School and American University Washington College of Law
  • Karl Okamoto, Professor of Law at Drexel University Earle Mack School of Law and former Dechert LLP and Kirkland & Ellis LLP Partner
  • Charles Whitehead, Professor of Law at Cornell Law School and former senior counsel at
    various international financial institutions

The faculty will be joined by a group of experts from law firms and corporate legal departments from around the world who will interact with the course participants through written feedback, online discussion boards and streaming video.

WHAT will the MOOC cover?

  • The Why and How of Acquisitions
  • A discussion of the economic and strategic motivations for acquisitions and the role lawyers play.
  • Overview of the steps for completing acquisition transactions.
  • Anatomy of an Acquisition Agreement
    • An introduction to the provisions of an agreement and their interplay.
    • Indemnification
    • An in-depth look at the primary “battleground” in the negotiation of an acquisition agreement.
    • Due Diligence
    • Why it matters. How it works. Common issues.

WHEN does the MOOC occur?

  • October 23, 2012 through November 7, 2012

HOW do I participate?

  • Interested participants can register for the MOOC by visiting www.LawMeets.com. Early registrants will receive email updates and the opportunity to complete a practice online exercise.
  • To learn more, please visit www.LawMeets.com or email us at contact@lawmeets.com.

 

September 11, 2012 in Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Monday, August 20, 2012

Comparison of One-Step and Two-Step Mergers

Haynes and Boone has a short summary of the pros and cons of each here.

MAW

August 20, 2012 in Deals, Going-Privates, Leveraged Buy-Outs, Merger Agreements, Mergers, Tender Offer, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 3, 2012

Weil on Arbitration vs. Litigation

Practitioners are often asked by their clients, "Which do you recommend to resolve disputes under a merger agreement: Litigation or Arbitration?"

Here's a Weil client alert by Sara Duran that "addresses the pros and cons of arbitration, situations where litigation may be preferable and drafting considerations for an agreement to arbitrate, in each case, from the viewpoint of US counterparties arbitrating domestically and applying US law."

MAW

 

January 3, 2012 in Contracts, Litigation, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Thursday, October 6, 2011

Weil, Gotshal survey of sponsor-backed going private transactions

Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.  Have a look.

MAW

 

October 6, 2011 in Deals, Going-Privates, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity, Research, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 23, 2011

Dispute Management Provisions in M&A Agreements

John Coates, IV has posted an interesting new paper Managing Disputes Through Contract: Evidence from M&A. The paper looks at dispute management provisions in a sample of 120 randomly chosen M&A contracts from 2007 and 2008. The paper examines contract terms “aimed at managing litigation, such as (a) clauses mandating and setting the scope for arbitration; (b) choice of law clauses, (c) forum selection clauses, (d) jury waivers, (e) clauses allocating legal costs in the event of a dispute, and (f) clauses attempting to increase or decrease the odds that a court will award specific performance as a remedy in the event of breach.”

Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions in correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.

- AA

August 23, 2011 in Delaware, Lawyers, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Monday, June 27, 2011

Kelley & Ervine on anti-Sandbagging

When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is.  One area where this is often the case is anti-sandbagging provisions.  This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:

In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.

In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.

Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.

MAW

June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 11, 2011

The Latest Reverse Termination Fee Study

The Practical Law Company has issued a new study of study of reverse termination fees and specific performance in public merger agreements. The study (which can be accessed here) covers 2010 deals (181 merger agreements with a signing value of at least $100 million).  It looks like specific performance remained the dominant contractual remedy for a buyer’s failure to close the transaction due to a breach or financing failure, especially in the case of strategic buyers. Financial-buyer deals, however, were more varied.

- AA

May 11, 2011 in Merger Agreements, Research | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 3, 2011

K&E Survey of Recent Developments in Public M&A Deal Terms

K&E just published this "survey" of recent developments in public M&A deal terms.  Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to.  Still, a worthwhile read.

MAW

May 3, 2011 in Deals, Lock-ups, Merger Agreements, Mergers, Private Equity, Tender Offer, Transactions | Permalink | Comments (0) | TrackBack (0)