November 30, 2011

SPEAKING VOLUMES: A Review of Model Merger Agreement for the Acquisition of a Public Company

David A. Katz

M&A practitioners can rejoice; there is a new bible for professionals involved in the acquisition of public companies. For the first time, there is a single source that will appeal to the law student, the young corporate associate, as well as the seasoned professional, that uses a model merger agreement to discuss the ins-and-outs of acquiring a U.S. public company. The Model Merger Agreement for the Acquisition of a Public Company, developed by the ABA Business Law Section's Mergers and Acquisitions Committee (through its Subcommittee on Public Company Acquisitions), was 17 years in the making and is an outstanding publication that offers practical advice and form documents. This publication is bound to become a trusted resource for practicing lawyers, in-house attorneys and general counsel, investment bankers, and members of the judiciary, who deal with various aspects of public company M&A issues, whether on a daily basis or for a once-in-a-lifetime transaction.

The Model Merger Agreement is intended to represent a strategic buyer's initial draft of a merger agreement for the acquisition of a public company ina stock-for-stock merger transaction. Thus, the Model Merger Agreement is not the result of a negotiated transaction but shows a reasonable starting point for the buyer to take and then, in the commentary, addresses the range of responses a target company could take in response to the buyer's initial position. When using the Model Merger Agreement, it is important for the reader to understand the basic fact pattern for the agreement, as deviations from the fact pattern must be identified so that particular circumstances can be addressed. The commentary does an excellent job of describing how subtle variations from the given fact pattern might impact the negotiation of the actual merger agreement.

The commentary that accompanies the Model Merger Agreement is invaluable. In the introduction, the commentary focuses the reader on the purpose of the initial draft of the merger agreement, the role that leverage plays in deal negotiations, and differences in negotiating styles. The introduction also highlights the differences between acquisitions of public companies and private companies, the use of stock versus cash for the acquisition consideration and the impact of these differences on language and structure of the merger agreement. The introduction concludes with a comprehensive discussion on providing advice to the target company's board of directors and the circumstances when different standards of judicial review might apply to board decisions.

The Model Merger Agreement is organized along the lines of a typical merger agreement: Article 1 deals with the mechanics of the proposed merger, including the conversion of shares; Article 2 discusses representations and warranties of the target company, while Article 3 covers the representations and warranties for the buyer and its acquisition subsidiary; Article 4 deals with covenants; Articles 5 and 6 deal with conditions precedent for each party; Article 7 describes termination provisions and their effect; and Article 8 describes miscellaneous provisions that often do not get sufficient focus during deal negotiations but, in fact, often prove to be outcome determinative when the deal goes astray.

Several of the comments to the Model Merger Agreement deserve special attention. The comment at the beginning of Article 2 starts with the two basic purposes of the representation and warranty provisions and then goes on to describe how these provisions can be limited by disclosure schedules, dates, SEC filings, knowledge qualifiers, and other provisions that effectively transfer risk from one party to the other. Article 4 has a comprehensive discussion of fiduciary duties under various circumstances and how the no-shop provisions and fiduciary-out provisions operate in tandem with obligations with respect to the target company's shareholder meeting and board recommendation of the proposed merger. The detailed commentary accompanying section 4.6 highlights the various positions the buyer and the target company might take with respect to the negotiation of the changes to the target board's recommendation. The commentary to section 5.7 has an excellent discussion of the material adverse change provision and how it operates in the context of the merger agreement. Article 7 has a detailed discussion of the impact of various termination provisions and the limitations on break-up fees. Finally, Appendix A to the Model Agreement has a 10-page detailed commentary on exchange ratios, collars, and walkaway provisions, with helpful charts, showing how various provisions operate in practice; in my view this section should be required reading for all corporate associates.

The Model Merger Agreement also includes three other model agreements with detailed commentary: a confidentiality agreement, an exclusivity agreement, and a voting agreement. Not only does the commentary discuss how these agreements are negotiated, but the discussion includes a number of practical applications that will allow these agreements to be tailored to specific circumstances. For example, the model confidentiality agreement talks about the different approaches the parties might take when information is shared by both parties—either doing a single mutual confidentiality agreement or having two one-way agreements, each of which covers a particular party's sharing of confidential information. The commentary also notes the relevance of Regulation FD to the confidentiality agreement and has a detailed discussion regarding the negotiation of standstill provisions in the context of the confidentiality agreement. With respect to the model exclusivity agreement, there is a detailed discussion regarding the important issues to be considered by both parties in entering into such an agreement (such as fiduciary exceptions and the need for board approval) as well as a discussion of recent Delaware cases involving exclusivity agreements. The commentary accompanying the model shareholder voting agreement identifies a number of important issues that a buyer should consider in negotiating such an agreement, tackling everything from avoiding the triggering of Delaware's antitakeover statute section 203, to the impact of gun-jumping and proxy solicitation issues, to Exchange Act section 13(d) implications.

The Model Merger Agreement includes a CD-Rom with the full text of each of the model agreements: the merger agreement; the confidentiality agreement; the exclusivity agreement; and the shareholder voting agreement. This feature will be very helpful to a draftsperson who wants to utilize particular portions of the model agreements without the hassle of retyping them.

The Mergers and Acquisitions Committee is to be applauded for their perseverance over the last 17 years to develop a truly working model of a merger agreement with practical applications that are discussed in detail in the commentary. Even seasoned M&A professionals will learn something from the commentary, which provides useful references to case law, as appropriate. While focus of much of the commentary is on Delaware law, and the Delaware Bar has been actively engaged in explaining the operation of various provisions of the Model Agreement, differences in other state's laws are identified, such as in the discussion of the case law regarding the operation of material adverse change clauses.

All-in-all, The Model Merger Agreement is an excellent contribution to the M&A practice landscape. The Mergers and Acquisitions Committee has accurately captured many of the practical aspects of negotiating public company merger agreements. This publication will educate countless corporate lawyers so that they can better counsel their clients on the ins-and-outs of public company acquisition transactions. It will also be a great teaching tool for law school classes that seek to impart practical advice to soon-to-be lawyers. My only hope is that this can be a dynamic work that is supplemented as the case law develops and merger agreement provisions adapt to changes in the regulatory landscape and deal practice.

David A. Katz

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz in New York City and an adjunct professor at the New York University School of Law and Vanderbilt Law School. By way of disclosure, the author sat in on several drafting sessions during the book project and contributed his thoughts to the issues being addressed at those meetings, although he did not do any drafting on the project and was also not a member of the Editorial Board. The views expressed here are the author's and do not represent the views of his partners or his firm.