Adjusting Consideration and Risk in Purchase and Support Agreements
General trends in the drafting of agreements relating to the acquisition of shares of public entities will reflect the caution shown in 2012. Buyers will be attempting to limit transaction risk and both parties will try to bridge the gap between buyer and seller in determining future value. Adjustment provisions in both directions can be very flexible in a private M&A context, and can include
- Escrow provisions, holding back consideration to cover representations generally and to cover specific representations which go to the core value
- Use of earn-outs in various forms, including cash top-ups and retaining an ongoing interest in convertible instruments or preferred shares in public situations
However in public M & A for shares, these adjustment mechanisms are rare. The difficulties in providing for post-closing flexibility in public M&A transactions may feed a preference for the acquisition of desirable assets from public companies, rather than bids for shares. Alternatively, instruments could be distributed which provide potential additional consideration on an earn-out basis or represent an interest in any net holdback. There has been limited past use of similar value-tracking instruments where the value of an asset (e.g. litigation) has been highly conditional.
Closing Conditions in Support Agreements in Public M&A
Some interesting recent studies have posited that the failure of markets to consistently reflect the different conditionality of different acquisition agreements should result in a different approach to merger agreements [Manns, Jeffrey David and Anderson, Robert, The Merger Agreement Myth (July 15, 2012), Cornell Law Review, Forthcoming; 7th Annual Conference on Empirical Legal Studies Paper. Available at SSRN]. That paper suggested that failure to meet most conditions should result in price adjustments (or "contingent consideration") rather than deal failure (or "contingent closing").
Closing Periods and Reverse Break Fees
A more trying climate in terms of meeting closing conditions (especially government approvals) may be reflected in longer closing terms coupled with higher reverse break fees.
Confidentiality Agreements and Standstills
There has been significant turbulence in U.S. courts in interpreting standstill terms, which leaves an apparent gap between the views of Canadian and U.S. courts on assessing directors' decisions to agree to tie their hands. Expect further experimentation. For a review of recent relevant cases, click here for our bulletin on this topic.
Advisory Agreements
A more turbulent financial market continues to be reflected in comings and goings (but mainly goings) in advisory areas. Changes in service businesses may be reflected in engagement terms. For example, "tails" for financial advisers may be made conditional on preservation of the individual members of the targeted working team within the advisor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
