Mergers and Acquisitions – Deal Protection Measures
Posted by Securities Attorney Laura Anthony | June 12, 2011 Tags: , , , , , ,

Many clients ask me how to protect their interests while trying to negotiate a merger or acquisition. During the negotiation period both sides will inevitably incur a certain, acceptable, expenditure of time and expense, and will provide one and other with confidential information. Although a confidentiality agreement protects confidential information, it does not protect against unnecessarily wasting time and expense. Fortunately, there are other measures that can be enacted to safeguard against a flat-out waste of time and money.

Many, if not all, letters of intent contain some sort of exclusivity provision. In deal terminology these exclusivity provisions are referred to as “no shop” or “window shop” provisions. A “no shop” provision prevents one or both parties from entering into any discussions or negotiations with a third party that could negatively affect the potential transaction, for a specific period of time. That period of time may be set in calendar time, such as sixty days, or based on conditions, such as completion of an environmental study, or a combination of both.

The Window Shop Provision

A “window shop” provision allows for some level of third-party negotiation or inquiry. Examples of a window shop provision may be that a party cannot solicit other similar transactions, but are not prohibited from hearing out an unsolicited proposal. A window shop provision may also allow the board of directors of a party to shop for a better deal, while giving a right of first refusal if such better deal is indeed received. Window shop provisions generally provide for notice and disclosure of potential “better deals” and either matching or topping rights.

Generally both no shop and window shop provisions provide for a termination fee or other detriment for early termination. The size of the termination fee varies, however, drafters of a letter of intent should be cognizant that if the fee is substantial it likely triggers a reporting and disclosure requirement, which in and of itself could be detrimental to the deal.

The Go Shop Provision

Much different from either a no shop or window shop provision is a “go shop” provision. To address a board of directors fiduciary duty in some instances to maximize dollar value for its shareholders, a potential acquirer may request that the target “go shop” for a better deal up front to avoid wasted time and expense. A go shop provision is more controlled than an auction and allows both target and acquiring entities to test the market prior to expending resources.

Another common deal protection is a standstill agreement. A standstill agreement prevents a party from making business changes outside of the ordinary course, during the negotiation period. Example include prohibitions against selling off major assets, incurring extraordinary debts or liabilities, spinning of subsidiaries, hiring or firing management teams and the like.

Finally, many companies protect their interest by requiring significant stockholders to agree to lock-up agreements pending a deal closure. Some lock-ups require that the stockholder agree that they will vote their shares in favor of the deal as well as not transfer or divest themselves of such shares.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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