Techniques and Strategies in Protecting an Acquisition Transaction

February 20, 1998

Introduction

1.1 Purpose Of Outline.  This outline focuses on the various issues that must be considered in seeking to protect a negotiated corporate acquisition so that it does not break apart in a manner detrimental to the parties.  During the period between the time a potential acquisition is first identified to the closing of the transaction, events and circumstances can arise to defeat its consummation.  For instance, after a proposed acquisition is publicly announced, competing bidders can intervene to make a better offer that thwarts the acquiror’s proposal.  And, there is always the risk that an event will occur that prevents a closing condition from being satisfied thereby triggering a termination of the deal.  The repercussions of a busted deal can be adverse to the constituent companies.  Indeed, many a would-be acquiror has turned out to be merely a “stalking horse” for the sale of a target company because its proposed deal slipped away without its receiving any financial compensation even though its efforts ultimately led to a favorable deal for the target company’s stockholders.  And, in those cases where an acquiror legitimately walks away from a publicly announced transaction, the target company can suffer great harm because it may then be viewed in the market place as being “damaged goods.”  In light of the potential downside to a busted deal, taking steps to protect a proposed corporate acquisition is typically very important to both sides of the transaction (although some sellers have found that leaks can conveniently improve their bargaining position with the acquiror).

1.2 Role Of Legal Counsel.  Legal counsel will play a major role in assuring that a proposed transaction does not unravel except under limited conditions negotiated between the parties.  The lawyer’s role will begin at the earliest stages of a proposed transaction.  While each party will expect its own counsel to negotiate an “air-tight” legal document from its viewpoint, no acquisition agreement (especially a heavily negotiated one) can ever be made totally bullet proof against the risk of not closing.  For that reason, it is incumbent on legal counsel to carefully analyze and advise the client about the pertinent risks in not consummating a transaction and then to negotiate contractual provisions that reasonably protect the client against such risks.  This outline discusses certain transaction risks and the strategies for protecting against them.

1.3 Perspective Of Outline.  This outline is written primarily from the perspective of negotiating and consummating an acquisition transaction in which the target is a public company.  Transaction risks and the methods for dealing with them as described in this outline have, for the most part, limited application to the acquisition of a private company by a public company.  It should also be noted that most of the issues discussed in this outline are applicable whether the acquiror uses cash or its stock as currency for completing the acquisition.  However, as noted below, stock-for-stock transactions can present some special risks in getting a transaction consummated.  Even so, in contrast to a cash acquisition, the interests of the acquiror and the target company in a stock-for-stock transaction will be more identical insofar as each performs due diligence on the other and takes appropriate steps to protect the transaction.

1.4 Initiating The Deal Process.  The starting point of an acquisition can occur in several ways.  It can begin by the target company’s decision to put its self up for sale.  In accomplishing that objective, the target company will often seek the aid of an investment banking firm in conducting a full blown auction process.  Or, the target company may decide to approach a selective number of potential acquirors to get an indication of interest and then proceed to negotiate with a few or perhaps only one.  The advantage of singling out one potential acquiror is to induce a pre-emptive bid (“blow out” bid) for the target company.  In other cases, a target company may seek a stock-for-stock merger with another entity (including a competitor) for strategic reasons.  And, of course, management-led leveraged buyouts are always a possible means of achieving a sale of the target company.  But, regardless of the avenue taken, the sale of a company always requires careful orchestration in order to comply with the fiduciary duties of the seller’s board of directors and to avoid the company becoming “worn goods” in the market place if the attempted sale fizzles.

Another starting point for an acquisition is where a potential acquiror identifies an acquisition and then proceeds to contact the target company to determine its level of interest.  While the would-be acquiror may be “shown the door,” preliminary discussions can often lead to serious acquisition negotiations.  Early on, the attitude of the potential acquiror toward pursuing a hostile takeover must be considered.  Most certainly, it will be a major concern to a target company’s management when it is contacted about entering into friendly acquisition discussions.  Of course, some acquirors may enter the acquisition picture as a “white knight” in a hostile contest.  In any event, initiating discussions with a target company requires advanced planning by the acquiror and its advisors regardless of what triggers those discussions.

In initiating acquisition discussions, legal counsel for the acquiror and the target company will be asked to analyze and develop legal strategies aimed at achieving the desired objective.  Putting together the working group, selecting the best acquisition ploy, selecting the best transaction structure, organizing due diligence efforts and putting in place procedures for avoiding premature disclosures of the proposed deal will be of the first order for each respective party.  Once an agreement in principle is reached, legal counsel will then assist the client in the negotiation of a definitive agreement and ultimately, in closing the deal.  Set forth below is a discussion of these routes and the strategies that need to be considered in helping protect the deal.

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