Counsel to Counsel - November 2008 - (Page 15) Passing the test falls between 1.5 percent and 3 percent of transaction value, although it can be as low as half a percent or as high as 4-plus percent. “The selling company has a period of time, say 20 to 50 days, to shop the company to other buyers,” Unkovic explains. “If it’s an open deal, the company can continue to negotiate with potential buyers even after the go-shop period. In a closed no-shop, it must sign a deal within that window.” Typically, bust-up fees for deals signed inside the go-shop period are about half what they are for deals signed thereafter. the general counsel will want to look out for different things.” General counsel of target companies must be certain the go-shop clause is actually effective. A poorly drafted clause amounts to little more than window dressing. “To take an extreme example, if you had a 20-day go-shop that required a 4.5 percent termination fee and operated on a closed basis with full matching rights, it’s hard to see any subsequent buyer competing with that,” Unkovic says. “On the other hand, if you had a 50-day open deal with a two-stage termination fee, you could really get other buyers involved in a meaningful way.” As a general rule, anything less than a 30day shopping period is problematic, with the comfort zone being between 40 and 50 days. But there are no bright-line standards, and you must account for subjective factors. For example, 35 days spanning October might be better than 45 days that straddle August. For counsel of the bidding company, blocking competitors is often a key consideration—they could walk away with crown-jewel information even if their bid fails. Termination fees can also be a key point of contention. In general, first bidders tend to want go-shop rights to be sufficient, but not generous—just enough to withstand scrutiny. “I don’t think there’s any magic formula. There’s inevitably some give and take,” Unkovic says. “If the duration is longer, maybe the bust-up fee is larger.” In the end, there are no guarantees, but a solid go-shop clause goes a long way toward protecting both parties and managing the litigation risk that always looms when takeovers are discussed. “You can never eliminate the possibility of litigation, and in large transactions, litigation is simply a part of the landscape,” Unkovic concludes. “But this helps you build the case that the board really and truly went out there and did its duty by shopping the company as actively as it could.” Nicholas Unkovic, a partner at Squire, Sanders & Dempsey L.L.P is Peer Review Rated. Unkovic, . who is managing partner of the firm’s Palo Alto, Calif., office, has significant experience in strategic alliances and M&A. A large portion of his work involves transactions for clients based in Asia. He can be reached at nunkovic@ssd.com. Two recent Delaware cases confirm the validity of go-shop clauses: In re Topps Co. Shareholders Litigation, 2007. The Topps Company, Inc. entered a merger agreement with former Disney CEO Michael Eisner’s private equity firm containing a go-shop provision that let Topps consider alternative bids for 40 days. The provision allowed Eisner to match any superior proposal and provided for a 4.3 percent termination fee if Topps took a better deal. A serious bidder did emerge, but the Topps board rejected the proposal. The Delaware Chancery Court found that Topps’ proxy statement for the vote on the merger agreement made material misstatements regarding the proposed transactions, and enjoined the shareholder vote. However, the court upheld the go-shop provision, including the time period and termination fee, as reasonable. In re Lear Corp. Shareholders Litigation, 2007. Lear Corporation entered a merger agreement with Carl Icahn’s American Real Estate Partners that contained a go-shop provision allowing the company to freely shop his bid for 45 days. The provision allowed Icahn to match a superior proposal, and it allowed Lear to terminate the agreement to accept a superior proposal, in which case it was required to pay Icahn a termination fee of 2.79 percent of the equity value or 1.9 percent of the enterprise value (increased to 3.52 percent of the equity, or 2.4 percent of the enterprise, if the deal was terminated after the go-shop period ended). No offers emerged during the go-shop period. Because the court found that the proxy statement for the merger vote omitted material facts relating to negotiations between Lear and its CEO, the Chancery Court issued a “very limited injunction prohibiting the procession of the merger vote until supplemental disclosure is made.” Again, the court upheld the go-shop provision, indicating that it was reasonable and did not fend off potential bidders. Why go-shop? • Quick response. A go-shop clause allows a target to accept an attractive offer and still have room to perform a market search and fulfill its fiduciary obligations. • Certainty. You have a deal locked in without the risk to value or reputation that can result from a failed deal or an auctiontype situation. As a result, everyone, from customers to employees, is less nervous. • Early bird. A go-shop clause gives a private equity or strategic buyer first-mover advantage. It doesn’t have to compete in an auction for the company up front, but it can cut a deal on its own terms and hope the transaction will be successful. Second bidders must bring more to the table, because the bust-up fee must be considered. But the go-shop clause is not without its thorns. There may be provisions that restrict other buyers—such as competing companies or other hedge funds—from entering bids, or that give the first bidder matching rights. These must be carefully negotiated, as they can tend to discourage second buyers who may feel they are just being used as stalking horses to close the deal. Give and Take “If the general counsel’s company is the target, it’s a bet-the-company endgame, and the general counsel is intimately involved very early. If the general counsel is part of the bidder or second-buyer group and the deal is material to the company, the general counsel is also likely to be involved,” notes Unkovic. “In each case, as a practical matter, www.martindale.com/c2c November 2008 15 http://www.martindale.com/c2c
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