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merger agreement. The target board was then faced with the delicate decision of
terminating the merger agreement, with the resulting uncertainty such an action would
create for the institution, or of agreeing to a full or partial waiver of the target’s walk-
away right (e.g., target proceeds with the transaction without requiring the acquiror to
"fill" or only requiring a partial "fill"). So while in some respects a walk-away can be a
comfort to a board weighing a stock for stock deal, this value must be considered in the
context of the rationale for the transaction and may not outweigh the disadvantages
where there is a compelling strategic business basis for the combination. This is
particularly true when considering that nearly all merger agreements contain termination
rights based on breaches of representations and warranties constituting an undisclosed
material adverse change in the acquiror.
If a walk-away termination right is triggered prior to closing, the parties will need
to choose between three possible outcomes: (1) consummate the transaction without
any price adjustment (in essence, the target waives its right to walk away), (2) terminate
the transaction or (3) agree to increase the exchange ratio to either fully or partially offset
the impact of the price decline below the walk-away trigger. Since this choice will likely
need to be made after shareholders have voted to approve the transaction, it is important
to review the proxy statement disclosure carefully to insure that the boards of the
companies have ample latitude for exercising their discretion to address these issues
without the need to resolicit the approval of shareholders. In some situations, the SEC
staff has focused on proxy disclosure regarding the waivability of the "fill" requirement.
As with anything that creates possible uncertainty about whether or not the
transaction will close or about deal pricing, collars and walk-aways may attract unwanted
attention from hedge funds and arbitrageurs and therefore have the potential to increase
trading pressure on the stock prices of the parties to the deal. Some widely available
publications track the arbitrage "spread" on pending deals on a daily basis.
4. Factors Influencing Choice of Pricing Structure
The pricing structure used in a particular transaction (and thus the allocation of
market risk between the acquiror and the seller and their respective shareholders) will
depend on the characteristics of the deal and the relative bargaining strength of the
parties. A pricing structure used in one deal may, for a variety of reasons, be entirely
inappropriate for another. For instance, the pricing structure in an acquisition involving
entities of significantly different size may be quite different from that employed in a
merger of equals or similar transaction, where the shareholders of each entity are being
given the opportunity to participate, over the longer term, in a new partnership.
The determination whether to negotiate for collar pricing will depend on various
factors, including the views on the potentially dilutive impact of an issuance, the overall
352
terminating the merger agreement, with the resulting uncertainty such an action would
create for the institution, or of agreeing to a full or partial waiver of the target’s walk-
away right (e.g., target proceeds with the transaction without requiring the acquiror to
"fill" or only requiring a partial "fill"). So while in some respects a walk-away can be a
comfort to a board weighing a stock for stock deal, this value must be considered in the
context of the rationale for the transaction and may not outweigh the disadvantages
where there is a compelling strategic business basis for the combination. This is
particularly true when considering that nearly all merger agreements contain termination
rights based on breaches of representations and warranties constituting an undisclosed
material adverse change in the acquiror.
If a walk-away termination right is triggered prior to closing, the parties will need
to choose between three possible outcomes: (1) consummate the transaction without
any price adjustment (in essence, the target waives its right to walk away), (2) terminate
the transaction or (3) agree to increase the exchange ratio to either fully or partially offset
the impact of the price decline below the walk-away trigger. Since this choice will likely
need to be made after shareholders have voted to approve the transaction, it is important
to review the proxy statement disclosure carefully to insure that the boards of the
companies have ample latitude for exercising their discretion to address these issues
without the need to resolicit the approval of shareholders. In some situations, the SEC
staff has focused on proxy disclosure regarding the waivability of the "fill" requirement.
As with anything that creates possible uncertainty about whether or not the
transaction will close or about deal pricing, collars and walk-aways may attract unwanted
attention from hedge funds and arbitrageurs and therefore have the potential to increase
trading pressure on the stock prices of the parties to the deal. Some widely available
publications track the arbitrage "spread" on pending deals on a daily basis.
4. Factors Influencing Choice of Pricing Structure
The pricing structure used in a particular transaction (and thus the allocation of
market risk between the acquiror and the seller and their respective shareholders) will
depend on the characteristics of the deal and the relative bargaining strength of the
parties. A pricing structure used in one deal may, for a variety of reasons, be entirely
inappropriate for another. For instance, the pricing structure in an acquisition involving
entities of significantly different size may be quite different from that employed in a
merger of equals or similar transaction, where the shareholders of each entity are being
given the opportunity to participate, over the longer term, in a new partnership.
The determination whether to negotiate for collar pricing will depend on various
factors, including the views on the potentially dilutive impact of an issuance, the overall
352
