Presenting a live 90-minute webinar with interactive Q&A M&A Deal Protection Terms: Leveraging Recent Court Decisions Negotiating No-Solicitation, Standstill, Fiduciary Outs, Matching Rights, and Change of Recommendation Provisions THURSDAY, AUGUST 30, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Steven M. Haas, Partner, Hunton & Williams , Richmond, Va. Bradley C. Faris, Partner, Latham & Watkins , Chicago A. Thompson Bayliss, Partner, Abrams & Bayliss , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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M&A Deal Protection Terms: Leveraging Recent Court Decisions Tom Bayliss, Abrams & Bayliss LLP Bradley Faris, Latham & Watkins LLP Steven M. Haas, Hunton & Williams LLP August 30, 2012
Today’s Discussion Outline Delaware Law on Deal Protections – Unocal or something else? Pre-Signing Deal Protections – Exclusivity Agreements – Standstill Agreements Post-Signing Deal Protections – Compellent Litigation Issues Q&A 6
Delaware Law on Deal Protections 7
Tests Potentially Applicable To Deal Protection Measures Business Judgment Test – In re IXC Communications, Inc. (Del. Ch. Oct. 27, 1999) Unocal Test – Unocal Corp. v. Mesa Petroleum Co. (Del. 1985) – Unitrin, Inc. v. American General Corp. (Del. 1995) Revlon Test – Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986) Other Tests – Entire Fairness Test – Blasius Test – Liquidated Damages Test 8
Business Judgment Test Default standard Evaluates whether decision was rational, not reasonable – Presumes that, in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company – Gives “great deference” to directors’ decision In re IXC Communications, Inc. (Del. Ch. Oct. 27, 1999) – “Neither the termination fee, the stock option agreements nor the no - solicitation provisions are defensive mechanisms instituted to respond to a perceived threat to a potential acquiror” – “In the absence of a showing of disloyalty or lack of care in agreeing to the termination fee, these provisions are reviewable as business judgments and are, thus, granted deference” 9
Unocal Test Triggered by the adoption of “defensive measures” Evaluates: – Whether the board had reasonable grounds for believing that a danger to corporate policy and effectiveness existed; – Whether the board’s response to the threat was coercive, preclusive or beyond a range of reasonableness Unocal Corp. v. Mesa Petroleum Co. (Del. 1985) – “Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.” – Directors must bear the burden of demonstrating that they satisfied the Unocal test. 10
Revlon Test (The Trigger) Revlon applies: – (1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break- up of the company…; – (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company; or – (3) when approval of a transaction results in a sale or change of control.” In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995). 11
Revlon Test (The Trigger Continued) What constitutes a “change in control”? Paramount Communications v. QVC Network , 637 A.2d 34 (Del. 1993) – Inquiry: whether control of the corporation will remain in a large, fluid, changeable and changing market – In other words, will the combined company have a controlling stockholder and relegate the target stockholders to a minority status, thus making the transaction under review the last chance for stockholders to receive a control premium for their shares – See also Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994) (applying the business judgment rule instead of Revlon to a stock-for-stock merger where, among other things, “plaintiff’s opportunity to receive a control premium is not foreclosed”) 12
Revlon Test (Application) Evaluates whether the directors obtained the best price reasonably available – Directors’ role changes “from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders” – “No single blueprint” for fulfilling Revlon duties – Reasonableness, not perfection, is required Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986) – “[W]hen bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions.” (emphasis added) – “Market forces must be allowed to operate freely to bring the target’s shareholders the best price available for their equity. Thus, as the trial court ruled, the shareholders’ interests necessitated that the board remain free to negotiate in the fulfillment of that duty.” (emphasis added) 13
Entire Fairness Test Triggered where directors were beholden or interested or where they acted with gross negligence Evaluates: – Whether the board conducted a “fair process” (how the challenged transaction was timed, initiated, negotiated, and structured, as well as how approvals were obtained) – Whether the board obtained a “fair price” (whether the challenged transaction was economically fair) 14
Blasius Test Triggered where directors’ primary purpose was to interfere with or impede the exercise of the shareholder franchise Evaluates: – Whether the board has a “compelling justification” for its action Blasius Indus. v. Atlas Corp . (Del. Ch. 1988) MM Companies, Inc. v. Liquid Audio (Del. 2003) – “Maintaining a proper balance in the allocation of power between the stockholders' right to elect directors and the board of directors' right to manage the corporation is dependent upon the stockholders' un-impeded right to vote effectively in an election of directors.” 15
Liquidated Damages Test Triggered by express language indicating that termination fee “constitutes liquidated damages and not a penalty” Evaluates: – Whether the expected damages are uncertain; and – Whether the amount agreed upon is reasonable Brazen v. Bell Atlantic Corporation (Del. 1997) – “Given the volatility and uncertainty in the telecommunications industry due to enactment of the Telecommunications Act of 1996 and the fast pace of technological change, one is led ineluctably to the conclusion that advance calculation of actual damages in this case approaches near impossibility.” – “Thus, to fail the second prong of [the test], the amount at issue must be unconscionable or not rationally related to any measure of damages a party might conceivably sustain.” 16
Pre-Signing Deal Protections 17
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