CHAPTER 7 NEGOTIATED TRANSACTIONS—STRUCTURE AND ISSUES

• Jurisdiction: United States

Mergers and Acquisitions of Natural Resources Companies
(Nov 1994)
CHAPTER 7
NEGOTIATED TRANSACTIONS—STRUCTURE AND ISSUES
Allen I. Isaacson
Paul M. Reinstein
Fried, Frank, Harris, Shriver & Jacobson
New York, New York

1. Initial discussions between parties

1.1 Need for cooperation of target

(a) Acquirers are more cautious

(b) Financing dependent on due diligence

1.2 Longer negotiating periods

(a) Greater possibility of leaks

1.3 Due diligence

(a) In stock for stock transaction, need for mutual due diligence

(i) Review of projections of bidder and target

(b) Emphasis on business due diligence; review of contingent liabilities

(i) Desirability of environmental study

(c) Review of acquiror's financing

(d) Antitrust issues

(i) If parties are competitors, certain pricing related information may be required to be withheld

(e) Title issues

(f) Confidentiality agreements

1.4 Even if target is public company, no requirement to "auction" company

(a) If stock transaction, may not be viewed as "sale" and Revlon duties not implicated

(i) However, if a single stockholder will control merged company, transaction may be viewed as a "sale"

(b) Use of "no shop" and break-up fee provisions

[Page 7-2]

(c) Fiduciary responsibilities

1.5 Confidentiality agreement

(a) Use of "standstill"

1.6 Disclosure

(a) When must negotiations be disclosed?

(b) "No comment" policy

2. Timing issues

2.1 Due diligence

2.2 If public deal, form of transaction — 2 step or 1 step — see Section 3 below

2.3 Regulatory issues

3. Structure of public transaction

3.1 If all cash transactions, generally tender followed by merger is quickest means of accomplishing transaction

(a) Tender offer can generally be completed in 20 business days; use of proxy statement will require 2-3 months. See Section 4 below

(b) If more than 90% of stock acquired, depending on state of incorporation of target, second step merger, without proxy statement, can be accomplished

(c) In transactions which are subject to regulatory approval, shareholder approval of one-step merger may be more effective way to lock-up transaction than keeping tender offer open subject to regulatory approval

(d) Some control share statutes may require vote of shareholders even in conjunction with tender offer; consequently, one-step merger may be advantageous

[Page 7-3]

3.2 Stock for stock transaction

(a) If more than 20% of acquiror's stock (if NYSE company) being issued or if acquiror has insufficient authorized shares, acquiror, as well as target, will require shareholder vote

(b) Tax free exchange

(c) Exchange ratio

(i) Fixed ratio

(ii) Fixed value in bidder stock, subject to collar

(iii) Consider walk-away rights if market prices exceed collar by specified amount

(iv) Even if no walk-away right, transaction is generally conditioned on update of investment bankers' opinions and lack of material adverse change

(v) Mutuality of collar and walk-away rights

(vi) Ratio normally determined based upon average trading price in 10-20 day period prior to mailing of proxy or closing

(d) Resale restrictions on target shareholders: Rule 145(d)

3.3 Part cash/part securities transaction

(a) If mostly cash...