Speed Reading: Ten Issues to Spot in a Public Company Merger Agreement

Review of a merger agreement often needs a quick turnaround. This commentary focuses on 10 key issues that give deal teams a sense of whether a deal is achievable and can form the basis for an easy-to-digest comparison of competing bids on an expedited basis. Most issues focus on price and closing certainty and tend to require negotiation among the principles.

Excerpt:

Public company merger agreements regularly exceed 60 pages. Yet, clients often need feedback within hours of receiving the first draft. Is it possible to provide any meaningful guidance on an expedited basis? Although every deal is different, and every merger agreement requires a close read, any initial review of a draft merger agreement should focus on ten key issues. Most of the key issues relate to price and closing certainty, and focusing on these ten issues will give the deal team a sense of whether reaching a deal is achievable. These ten issues also can form the basis for an easy-to-digest comparison of competing bids.

1. Merger Consideration

Usually the first draft of a merger agreement does not include dollar amounts or a specific exchange ratio. Often this is because those matters have not yet been agreed, because the parties do not want to increase their risk of a leak of the valuation or because the parties do not want to trigger a disclosure requirement by documenting an agreed price. Even in the absence of specific price information, a quick read of the merger consideration provisions in the merger agreement can provide valuable information, including the following:

What is the proposed form of consideration (cash, stock, mixed or other)?

If stock consideration is proposed, is the exchange ratio fixed or floating? Are there any collars? Are there built-in dilution adjustments? Are there any other adjustments (for example, if the draft contemplates a fixed exchange ratio based on the parties' relative tangible book values, what is the mechanism for "bringing-down" those valuations at closing, if any)?

If mixed consideration is proposed, is there a cash election or pro rata allocation mechanism?

Are there any built-in purchase price adjustments? Are the adjustments pre-closing or post-closing? If post-closing, is there an escrow or a holdback?

What is the proposed treatment of preferred stock, stock options, restricted stock units, share appreciation rights, warrants and other securities (e.g., cash out v. roll-over)?

In addition to spotting business issues associated with the merger consideration calculations, a quick read of the merger consideration provisions will also identify critical structuring issues, such as whether a target's preferred stock and equity awards can be cashed-out in a deal without the consent of the holders and whether a proposed cash-election mechanism is permissible under the proxy rules.

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