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.
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
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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