The Golden Ratio of Corporate Deal-Making

The article discusses the Delaware Supreme Court\u27s decision in the case \u27Revlon, Inc. v. MacAndrews & Forbes Holdings Inc.\u27 in which the court sale of corporate control, the target\u27s board of directors has a duty to maximize stockholder value. Topics discussed include relationship between the deal protection devices and sale process; golden ratio of corporate deal-making; and the court\u27s definition of an ideal merger and acquisition of a sale process

Delaware as Deal Arbiter

Most would agree that the Delaware courts are the leading jurists in the resolution of corporate conflicts, particularly in the Mergers & Acquisitions (M&A) context. Arguably a greater role that Delaware plays is that of a norm setter, both with respect to the expectations of management conduct in the M&A process and with respect to deal terms, particularly deal protection devices. Like in any relationship, there is a “give and take” between practitioners and Delaware. That is, practitioners are “on the front lines,” often innovating with respect to new deal structures and deal terms. After some time, Delaware has the opportunity to review these innovations. As the Delaware courts render decisions, they comment on behavior in the deal process and on the legality of contractual provisions. In turn, practitioners take heed. They not only comply with these deal norms but, at least in the context of deal protection devices, they slowly push the boundaries. Delaware tends not to take issue with this boundary pushing as practitioners are largely complying with deal norms. This Article examines this relationship between practitioners and Delaware and argues that this circular effect has had the result of eroding the very enhanced scrutiny standards which the courts have announced

Rethinking Contractual Limits on Fiduciary Duties

The recent financial crisis has placed a renewed focus on completion risk in the world of mergers and acquisitions. Dealmakers have increasingly attempted to control for such risks by altering merger agreement provisions to achieve a greater level of deal certainty. This Article addresses one such provision – the merger recommendation covenant and its related fiduciary out. The purpose of the merger recommendation fiduciary out is to address a tension created by two fundamental precepts arising under corporate law and contract law – a board of director’s duties to the corporation and its stockholders versus the binding covenants of a merger agreement. This Article addresses such a tension: situations where a board of directors has a contractual commitment to recommend a transaction to its stockholders but where an event occurs after the signing of that agreement that would normally require a board, in honoring its fiduciary duties, to withdraw its earlier recommendation. Traditionally, the merger recommendation fiduciary out has allowed a board to withdraw its recommendation when a board determines that it would be consistent with its fiduciary duties to do so. Over the past several years, however, dealmakers have often limited these fiduciary outs to situations where the target company has only received a superior offer from an unrelated third party. Increasingly since at least 2005, dealmakers have limited the merger recommendation fiduciary out to Intervening Events, which are often defined as certain events that are not known or reasonably foreseeable to the board at the time the merger agreement is executed. Because the courts have yet to speak to the validity of such provisions, a debate has arisen among judges, practitioners, and commentators as to whether a board of directors may contractually limit its fiduciary duties in the context of the merger recommendation covenant. This Article breaks new ground in arguing that boards may in fact agree to narrower fiduciary outs in the context of the merger recommendation covenant. It contends that a board of directors that has complied with its fiduciary duties at the time it authorizes entry into the merger agreement should be aware of most events that could reasonably occur during the period between signing and closing. Thus, the board can consider such events during negotiations and structure the transaction to adequately address these possibly changed circumstances. Moreover, this Article argues that dealmakers should adopt staggered termination fee frameworks so that termination fees vary depending upon the event triggering the recommendation withdrawal. Such a staggered termination fee provides a check on the board’s decision to withdraw its recommendation and promotes deal certainty. Moreover, this Article encourages the continued use of disclosure provisions explicitly allowing the board to disclose changed circumstances to its stockholders while continuing to recommend the merger (as it may be required to do under the definitive merger agreement)

Rethinking Contractual Limits on Fiduciary Duties

The recent financial crisis has placed a renewed focus on completion risk in the world of mergers and acquisitions. Dealmakers have increasingly attempted to control for such risks by altering merger agreement provisions to achieve a greater level of deal certainty. This Article addresses one such provision – the merger recommendation covenant and its related fiduciary out. The purpose of the merger recommendation fiduciary out is to address a tension created by two fundamental precepts arising under corporate law and contract law – a board of director’s duties to the corporation and its stockholders versus the binding covenants of a merger agreement. This Article addresses such a tension: situations where a board of directors has a contractual commitment to recommend a transaction to its stockholders but where an event occurs after the signing of that agreement that would normally require a board, in honoring its fiduciary duties, to withdraw its earlier recommendation. Traditionally, the merger recommendation fiduciary out has allowed a board to withdraw its recommendation when a board determines that it would be consistent with its fiduciary duties to do so. Over the past several years, however, dealmakers have often limited these fiduciary outs to situations where the target company has only received a superior offer from an unrelated third party. Increasingly since at least 2005, dealmakers have limited the merger recommendation fiduciary out to Intervening Events, which are often defined as certain events that are not known or reasonably foreseeable to the board at the time the merger agreement is executed. Because the courts have yet to speak to the validity of such provisions, a debate has arisen among judges, practitioners, and commentators as to whether a board of directors may contractually limit its fiduciary duties in the context of the merger recommendation covenant. This Article breaks new ground in arguing that boards may in fact agree to narrower fiduciary outs in the context of the merger recommendation covenant. It contends that a board of directors that has complied with its fiduciary duties at the time it authorizes entry into the merger agreement should be aware of most events that could reasonably occur during the period between signing and closing. Thus, the board can consider such events during negotiations and structure the transaction to adequately address these possibly changed circumstances. Moreover, this Article argues that dealmakers should adopt staggered termination fee frameworks so that termination fees vary depending upon the event triggering the recommendation withdrawal. Such a staggered termination fee provides a check on the board’s decision to withdraw its recommendation and promotes deal certainty. Moreover, this Article encourages the continued use of disclosure provisions explicitly allowing the board to disclose changed circumstances to its stockholders while continuing to recommend the merger (as it may be required to do under the definitive merger agreement)

Promises Made to be Broken? Standstill Agreements in Change of Control Transactions

Many promises are made in the negotiation of a merger but not all promises are necessarily enforceable or consistent with a board of directors’ fiduciary duties. This article explores the enforceability of one such promise: the buyer’s standstill agreement. When a publicly traded company explores a sale, that company, the target, customarily requires each potential buyer to execute a standstill agreement. A typical standstill prevents potential buyers from publicly making or announcing a bid for the target during the sale process without the target’s prior consent and for a period of approximately twelve to eighteen months from the conclusion of the sale process. The enforcement of standstills can cause a conflict between two fundamental principles of mergers and acquisitions – a board’s duty to maximize stockholder value when selling a controlling stake of a target (or a board’s Revlon duties) and a board’s ability to use certain deal protection devices under the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co. and its progeny. This conflict is particularly evident after the target has executed a merger agreement with a “winning bidder” and a “losing bidder” makes a higher offer in contravention of the standstill. This overbid, or the potential for it, raises a number of questions that the Delaware courts, and academics alike, have yet to address. Namely, those questions revolve around a target board’s ability to consider a third party superior offer made in contravention of a standstill; a board’s promise not to waive a standstill; and a board’s ability to grant a “winning” bidder the right to enforce a standstill against a “losing” bidder. This article predicts, that when ultimately presented with these questions, Delaware courts will answer each question by examining the value maximization tools utilized by the board pre-signing to determine the reasonableness of the board’s decision-making process. Namely, the court will consider the extent to which the board “shopped” the company pre-signing. Moreover, in determining whether the board may legitimately promise not to waive a standstill or grant the “winning bidder” the right to enforce a standstill, the courts, consistent with Unocal, will also consider the purpose of the board’s actions under the circumstances of each case. Specifically, if a valid value maximization purpose is articulated and the board is not acting to further its own self-interests, then a Delaware court would likely find the board’s actions to be reasonable and uphold the board’s promises. In addressing these questions, this Article attempts to fill a thirty-year void in academic literature regarding the interplay of standstills and a board’s fiduciary duties during the pre-closing period

Delaware as Deal Arbiter

Most would agree that the Delaware courts are the leading jurists in the resolution of corporate conflicts, particularly in the Mergers & Acquisitions (M&A) context. Arguably a greater role that Delaware plays is that of a norm setter, both with respect to the expectations of management conduct in the M&A process and with respect to deal terms, particularly deal protection devices. Like in any relationship, there is a give and take between practitioners and Delaware. That is, practitioners are on the front lines, often innovating with respect to new deal structures and deal terms. After some time, Delaware has the opportunity to review these innovations. As the Delaware courts render decisions, they comment on behavior in the deal process and on the legality of contractual provisions. In turn, practitioners take heed. They not only comply with these deal norms but, at least in the context of deal protection devices, they slowly push the boundaries. Delaware tends not to take issue with this boundary pushing as practitioners are largely complying with deal norms. This Article examines this relationship between practitioners and Delaware and argues that this circular effect has had the result of eroding the very enhanced scrutiny standards which the courts have announced