USA Law and Practice Contributed by: Elena Rubinov, George Casey, Heiko Schiwek, Vinita Sithapathy, Pierre-Emmanuel Perais and Clara Pang, Linklaters LLP
fiduciary duties. These clauses do however permit the target company to entertain unsolicited supe- rior proposals. • Break fees: these are payable to the acquiror if the target board’s recommendation is withdrawn or the transaction is not approved by the target share- holders due to another transaction proposed by an interloper. A break fee may also be payable by the acquiror if it fails to close the acquisition, typically due to a financing or regulatory failure (“reverse” break fees). • Board or “force the vote” commitments: these require the board of directors to submit the trans- action to the target’s shareholders for a vote, even if the board no longer recommends that sharehold- ers vote in favour of the transaction. • Right to match (or top) other offers: the bidder may change the terms of its proposal to “match” or “top” a third-party proposal. See also 4.12 Irrevocable Commitments . State law imposes fiduciary duties on a target compa- ny’s board of directors to limit the use of certain deal- protection terms and make it challenging to “lock-in” a transaction. Unless the deal signs and closes simultaneously, the transaction will also involve interim operating cove- nants to maintain the target business between signing and closing and to deliver it at closing without material impairment. 4.11 Additional Governance Rights Before announcing a transaction, the acquiror may wish to execute agreements with the target com- pany’s board of directors and senior management to ensure they will tender their shares or vote in favour of a proposed merger. If the target company has sig- nificant shareholders, effective ways to “lock up” the deal include requiring such shareholders to sell their stock to the acquiror or to vote their stock in favour of the merger, or to tender their stock into the offer. These are not applicable in the USA. 4.12 Irrevocable Commitments
Delaware courts have struck down lock-up agree- ments that preclude the target company’s sharehold- ers from availing themselves of attractive subsequent offers. Further, any commitments by directors will be subject to review considering the directors’ duties. 4.13 Securities Regulator’s or Stock To solicit the shareholder vote required to approve a merger, the target must prepare and file a detailed “proxy statement” with the SEC. The proxy state- ment may not be disseminated to shareholders until the SEC staff have commented on it, and all such comments have been resolved. Upon finalisation, the target then mails the proxy statement to its share- holders and files it with the SEC. State law, the tar- get’s constitutional documents and rules of the stock exchange on which the target is listed will dictate the minimum time between the mailing of the proxy mate- rials and the date of the target shareholders’ meeting to approve the merger; 20 business days is typical. Tender Offers and Exchange Offers SEC rules for tender offers require that the acquiror file a Schedule TO (including an offer to purchase and related documents, such as a letter of transmit- tal). Since a tender offer is an offer made directly to the shareholders, no board of directors’ approval is required, although most friendly tender offers are made with board approval. Exchange Process Merger Transactions SEC rules require the target’s board of directors to state its position regarding the tender offer. The SEC will review and comment on any materials regarding the tender offer. The acquiror must address these comments (including filing amendments to the tender offer materials). If the SEC comment process leads to material amendments to the tender offer materials, the acquiror may have to extend the offer period and/ or disseminate new documents to the target’s share- holders. 4.14 Timing of the Takeover Offer See 4.13 Securities Regulator’s or Stock Exchange Process .
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