Unbundled bargains: multi-agreement dealmaking in complex mergers and acquisitions.

Author:Hwang, Cathy

Why are some bargains memorialized in dozens of related agreements, rather than one definitive agreement? This Article uses mergers and acquisitions (MIAA) deals as a lens through which to understand why some bargains are governed by arrangements that this Article calls "unbundled bargains." In an unbundled bargain, elements of a complex deal are broken out and memorialized in separate, but related, agreements. Unbundled bargains are common in MIA A deals--these deals are governed by a definitive acquisition agreement, and also by employment agreements, transition services agreements, intellectual property assignment agreements, and many other ancillary agreements that shape the deal's terms.

This Article shows that the boundaries of a deal extend beyond the acquisition agreement and into the manifold parts of an unbundled bargain. In the process, this Article makes three contributions to the literature. First, it provides a comprehensive account of why ancillary agreements exist, and shows that MIA A deals are, invariably, governed by unbundled bargains. Second, it shows that unbundled bargains reduce dealmaking costs ex ante and deal enforcement costs ex post by making deals more modular and improving the quality of each modular part. Third, it shows that reframing many related agreements as one unbundled bargain has significant implications for contract theory and transactional practice.

INTRODUCTION I. COMPLEX M&A AS UNBUNDLED BARGAINS A. The Acquisition Agreement B. Ancillary Agreements II. A NEW THEORY OF THE DEAL: UNBUNDLED BARGAINS A. The Efficiency of Unbundled Bargains 1. Deal Modularity. a. Complex Modules b. Simple Modules c. Modularity and Hierarchy 2. Deal Precision. a. Party Specificity b. Risk Specificity c. Time Specificity B. Alternative Explanations for Unbundling: Anticipated Critiques and Responses 1. Precedent and Path Dependency 2. Lawyers as Agents 3. Disclosure Differentiation C. Redefining the Boundaries of the Deal III. IMPLICATIONS FOR CONTRACT THEORY AND DEAL DESIGN A. Textualism and Contextualism B. Integration Clauses Under the Permeable Approach C. Optimal Unbundling D. Martin Marietta as an Unbundled Bargain CONCLUSION INTRODUCTION

In 2012, Delaware courts enjoined a $5.5 billion hostile takeover bid based on their interpretation of the word "between" in a confidentiality agreement. (1)

The courts' decisions in Martin Marietta highlighted the important role that ancillary agreements can play in shaping major business transactions.

Most mergers and acquisitions (M&A) scholarship has focused on the acquisition agreement--the heavily negotiated central agreement in any M&A deal. But all M&A deals are also governed by dozens of ancillary agreements--smaller agreements entered in conjunction with or around the time of the acquisition agreement--without which deals cannot go forward. This Article investigates why deals are memorialized with constellations of agreements, rather than with just one. Through a study of complex M&A deals, this Article begins to probe why these "unbundled bargains" exist, how they add value in business transactions, and what they imply for contract interpretation and deal design.

The facts of Martin Marietta are typical of the early stages of any friendly M&A deal. In 2010, the country's two largest construction aggregates companies, Martin Marietta Materials and Vulcan Materials, entered into two routine confidentiality agreements while discussing a potential deal. (2) Confidentiality agreements are among the most common ancillary agreements in M&A transactions: parties enter into these short, simple agreements to protect nonpublic information exchanged during initial evaluation and negotiation. (3) Because deal lawyers often consider confidentiality agreements straightforward and boilerplate, junior attorneys or in-house counsel usually draft them.

Martin Marietta's general counsel drafted the agreements, using a confidentiality agreement template that the parties had used before. (4) In the agreements, the parties agreed not to use information shared in confidence for any purpose other than "a possible business combination transaction... between [the parties]." (5) This meant, for instance, that they would not use proprietary information learned during due diligence to compete against each other. This is a common provision when the deal parties are competitors. Martin Marietta and Vulcan negotiated on and off over the next year and a half, exchanging nonpublic information in the process. (6) Friendly talks fizzled around the time changes in Vulcan's stock price made the deal particularly attractive to Martin Marietta. (7)

On December 12, 2011, Martin Marietta launched an unsolicited exchange offer for Vulcan's shares, preparing the offer using nonpublic information Vulcan had shared with Martin Marietta. (8) In its unsolicited exchange offer--a type of hostile takeover--Martin Marietta publicly offered to acquire Vulcan shares from any and all of Vulcan's stockholders. (9) Vulcan stockholders could exchange each Vulcan share for half a share of Martin Marietta's more valuable stock. (10) That same day, Martin Marietta filed suit in the Delaware Chancery Court, seeking a declaration that nothing in the confidentiality agreements barred Martin Marietta's hostile takeover. (11) Vulcan countersued, seeking to enjoin Martin Marietta's exchange offer. (12)

Ultimately, both the Delaware Chancery Court and the Delaware Supreme Court agreed with Vulcan, granting a four-month injunction against Martin Marietta's hostile takeover. (13) The opinions turned in part on the courts' interpretations of the word "between" in one of the confidentiality agreements. The parties had disputed the meaning of the provision that barred the parties from using information for purposes other than "a possible business combination transaction ... between [the parties]." (14) The courts found that the parties meant to limit use of the information to pursuit of a transaction between the two parties--Martin Marietta and Vulcan. (15) Because the hostile takeover was an attempt by Martin Marietta to buy shares from Vulcan's stockholders on the public market, rather than from Vulcan, it was not a transaction between the two parties. (16) Therefore, Martin Marietta violated the provision when it used nonpublic information in the hostile transaction. (17)

The Martin Marietta decisions caused a stir among deal lawyers. Companies seeking to sell themselves often require potential buyers to sign confidentiality agreements that have explicit "standstill provisions."^ These provisions prevent potential buyers from announcing a bid (including a hostile bid) for the target for a period of a year or two from the conclusion of the sale process. (19) The Martin Marietta confidentiality agreements did not contain explicit standstill provisions, but the courts nonetheless enjoined Martin Marietta's bid as though the agreements contained standstill provisions. (20)

Many deal lawyers lambasted the decisions for finding an "implied standstill provision." (21) One law firm noted that "the court ... gave very little, if any, weight to ... [the fact] that two sophisticated parties (with sophisticated counsel) did not discuss or include a standstill provision in [the agreement]." (22) Others called the decisions "a wakeup call ... that confidentiality agreements negotiated in the early stages of a deal can have significant consequences down the road." (23) A year after the decisions, one lawyer wrote that "[Martin Marietta] reminded people that these are real agreements. These are not boilerplate, and they're not something you just sign to move on.... People are spending a lot more time and being much more careful in constructing and negotiating them." (24)

For deal lawyers, Martin Marietta reveals the importance of small agreements in major deals. It shows that ancillary agreements like confidentiality agreements--drafted quickly by busy in-house lawyers or inexperienced first-year associates at law firms--must be taken seriously, and can significantly affect major deals. In Martin Marietta, a confidentiality agreement--an agreement so peripheral to the heart of the deal that it barely qualifies as part of the deal at all (25)--nonetheless determined the most important part of the deal: whether it could go forward at all.

If deal lawyers are just beginning to appreciate the importance of ancillary agreements in practice, legal scholars have an even more rudimentary understanding of the role these agreements play in shaping deals. To date, there has been no comprehensive account of why ancillary agreements exist. (26) Specifically, legal scholars have not tackled the issue of why M&A deals are governed by a constellation of agreements--the much-studied acquisition agreement and dozens of under-studied ancillary agreements--rather than by a single comprehensive deal document. This Article provides a comprehensive account of the dynamic interactions between ancillary agreements and acquisition agreements in M&A dealmaking. In doing so, it begins to develop a new theory of the deal and posits that a deal's boundaries extend beyond the acquisition agreement and into the corners of unbundled bargains. Reframing complex deals as unbundled bargains has important implications for contract theory and transactional practice: it suggests new ways for courts to interpret complex deal disputes and for parties to design better deals.

Both courts and parties routinely underestimate the boundaries of deals. This underestimation affects both the way that courts interpret deal disputes and whether parties choose to unbundle their deals into separate contracts. For example, although deal lawyers were aghast at the courts' decisions in Martin Marietta, reframing the Martin Marietta deal as an unbundled bargain sheds new light on the courts' decisions. The decisions actually suggest that those courts understood...

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