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from the deal if the trigger threshold is crossed, simply by adding more shares of the
acquirer’s stock to the purchase price.
Glover: One thing that you need to think about if you’re representing the target
and you’re asking for a price-based walk right: What is your board of directors really going
to do if you get to the point where the price of the acquirer’s stock has dropped below
the trigger threshold? Do you really terminate the deal? What are the fiduciary duties of
the board of directors in that circumstance? Do they have to go back to the target’s
stockholders?
As a practical matter, I suppose it usually works out as an opportunity to
renegotiate, but it does present a fairly difficult situation for the board to address.
Climan: No question, it can put the board in a very tough position, particularly
where the target company has lots of stockholders who don’t sit on the board.
***
MACs
Glover: There have been a number of events in the last year or so that have
provoked significant discussion about MAC-outs and other closing conditions in M&A
transactions. The first is the tragedy of September 11th. The second is the Delaware
Chancery Court’s decision in the IBP/Tyson Foods case. The third is Enron and, more
generally, concerns that seem to be becoming broader every day about corporate
governance and integrity issues. And the fourth is the general economic volatility we’ve
been experiencing.
Before any of these factors arose I would say — although it wasn’t completely
settled and there was always a negotiation — the practice on MAC-outs was pretty
consistent from deal to deal. At least you could generally anticipate the types of issues
that would arise. The acquirer would ask for the right to terminate the transaction if there
was an event that made it reasonably likely that there would be a material adverse change
in the business of the target company.
That typical MAC-out might be subject to a number of exceptions or carve-outs.
For example, the MAC-out might not be triggered by a general change in economic
conditions or by a general change in the conditions in the industry or sector in which the
target company operates, unless perhaps the target company suffers a disproportionately
large adverse change in its business.
There might also be a carve-out for adverse changes attributable to the
announcement of the deal itself. For example, recognizing that the announcement of the
368
acquirer’s stock to the purchase price.
Glover: One thing that you need to think about if you’re representing the target
and you’re asking for a price-based walk right: What is your board of directors really going
to do if you get to the point where the price of the acquirer’s stock has dropped below
the trigger threshold? Do you really terminate the deal? What are the fiduciary duties of
the board of directors in that circumstance? Do they have to go back to the target’s
stockholders?
As a practical matter, I suppose it usually works out as an opportunity to
renegotiate, but it does present a fairly difficult situation for the board to address.
Climan: No question, it can put the board in a very tough position, particularly
where the target company has lots of stockholders who don’t sit on the board.
***
MACs
Glover: There have been a number of events in the last year or so that have
provoked significant discussion about MAC-outs and other closing conditions in M&A
transactions. The first is the tragedy of September 11th. The second is the Delaware
Chancery Court’s decision in the IBP/Tyson Foods case. The third is Enron and, more
generally, concerns that seem to be becoming broader every day about corporate
governance and integrity issues. And the fourth is the general economic volatility we’ve
been experiencing.
Before any of these factors arose I would say — although it wasn’t completely
settled and there was always a negotiation — the practice on MAC-outs was pretty
consistent from deal to deal. At least you could generally anticipate the types of issues
that would arise. The acquirer would ask for the right to terminate the transaction if there
was an event that made it reasonably likely that there would be a material adverse change
in the business of the target company.
That typical MAC-out might be subject to a number of exceptions or carve-outs.
For example, the MAC-out might not be triggered by a general change in economic
conditions or by a general change in the conditions in the industry or sector in which the
target company operates, unless perhaps the target company suffers a disproportionately
large adverse change in its business.
There might also be a carve-out for adverse changes attributable to the
announcement of the deal itself. For example, recognizing that the announcement of the
368
