Page 360 - מיזוגים ורכישות - פרופ' אהוד קמר תשפב

termination right (a walk-away) by virtue of the customary mutual closing condition
requiring receipt of opinions of counsel to the effect that the transaction is tax free. This
would allow either buyer or seller to walk away from the transaction if the buyer’s share
price declined enough to lose qualification for tax-free reorganization treatment.

Fortunately, the IRS’s 2005 final regulations permit the parties, in certain
circumstances, to determine whether this requirement is met by reference to the fair
market value of the acquiror stock at signing rather than at closing, adding certainty to
the transaction. The 2005 final regulations were revised by temporary regulations issued
in March 2007. If a merger agreement provides for "fixed consideration," the new rules
measure whether the test is met as of the end of the last business day before the date of
the binding merger agreement. Under the regulations, an agreement provides for "fixed
consideration" if it provides the number of shares of each class of acquiror stock, the
amount of money, and any "other property" to be exchanged for all the target shares or
each target share, as the case may be. The 2007 regulations narrowed the circumstances
under which an agreement that provides target shareholders with an election to receive
acquiror stock and/or cash and "other property" will be treated as providing for "fixed
consideration.” Under the 2005 regulations, shareholder elections did not prevent a
contract from being treated as providing for fixed consideration if the contract specified
minimums and maximums for the acquiror stock and cash or "other property" to be
exchanged for the target stock. Under the 2007 temporary regulations, contracts that
allow for shareholders elections are treated as providing for fixed consideration only if
the determination of the number of shares of acquiror stock is based on the value of the
acquiror stock on the last business day before the date of a binding merger agreement.
Neither the possibility that some shareholders may exercise dissenters’ rights and receive
consideration other than the agreed merger consideration nor the fact that money may
be paid in lieu of fractional shares of the acquiror’s stock will prevent the merger from
being a fixed consideration transaction. Unlike the 2005 regulations, which provided that
a contract with a "collar" could be treated as providing for "fixed consideration" as long
as there was a proration mechanism to ensure that a fixed percentage of target shares
would be exchanged for acquiror shares, the 2007 temporary regulations do not apply to
transactions that utilize a "collar.”

Priced-Based Walk-Away Protection for the Seller: In connection with any pricing
formulas that could result in a reduction in the current value of the total purchase
consideration depending upon the future price performance of the acquiror’s shares, the
parties sometimes seek to negotiate price-based "walk-away" provisions. These
provisions, described in more detail above, require special attention in the part-cash,
part-stock setting. First, parties should be aware that a fixed cash component already
provides a natural hedge against stock valuation deterioration. Second, if a price-based
walk-away is used in the context of a part-cash, part-stock deal, the price-drop trigger for
a walk-away right should take into account the implicit hedge on deterioration in the

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