A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law
By William M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr.
The negotiation of a high-profile merger transaction often bears surprising similarity to a romantic courtship.
Mergers often start innocently enough—a text message, a phone call, or perhaps an e-mail between rival CEOs. In one way or another, the “ask” is made. Are you interested? Available? Can we work something out? The exact words are not really important. On at least one occasion, simple doggerel has been used to start the conversation.
If the answer is “no,” the parties typically will go their separate ways, perhaps leaving open the possibility of revisiting the idea at some point in the future. On occasion, however, a rejection can prompt hard feelings.
On the other hand, if the answer is “yes,” the situation can often advance quickly. If the target and the suitor are a match, a deal can be agreed to and consummated in a matter of months or even weeks. If word should spread that the target corporation is not averse to courtship, other potential suitors may come forward and complications can ensue. In such circumstances, the directors of the target corporation often opt to resolve the choice presented by putting the fitness of the competing suitors to the test before making their decision. Secure in its knowledge of the available partners, and in order to evidence its commitment to the relationship, the target corporation may agree to terms designed to discourage third-party advances by including in the merger agreement defensive provisions such as termination fees, match rights, or “force-the-vote” provisions. Such provisions add a layer of protection to the declared relationship and proclaim the intent to go steady. The target that fears that the initial expression of interest could dissipate while an extensive search is undertaken may instead choose to sign an agreement that is subject to a condition subsequent. This allows the target to play the field by way of a post-signing market check or go-shop process, at least for a while before things get too serious.