No-Shops & Fiduciary Outs: A Survey of 2012 Public Merger Agreements

One of the fundamental tenets of corporate law is that boards of directors owe fiduciary duties to the corporation and its stockholders. In the context of a sale of the corporation, these duties may require a board of directors to pursue multiple transactions in an effort to ensure that the corporation’s stockholders receive the highest price reasonably available for their shares. However, once a merger agreement has been signed, the board of directors of the target corporation typically becomes subject to contractual commitments not to pursue alternative transactions and to recommend the transaction to its stockholders. The potential tension between a board’s fiduciary duties to obtain the highest price reasonably available when it is in “Revlon” mode and its commitments in the merger agreement is implicated when an event occurs after the signing of the merger agreement—such as the receipt of a competing acquisition proposal—that would normally require a board, in satisfying its fiduciary duties, to change direction and withdraw its recommendation of the transaction.

Fiduciary out provisions in a merger agreement aim to reconcile the tension between a board’s continuing fiduciary duties, on the one hand, and the binding no-shop covenants of the merger agreement, on the other hand. Because this need to protect a target corporation board’s ability to exercise its fiduciary duties is in opposition to a buyer’s desire for deal certainty, fiduciary out provisions can become some of the most hotly negotiated provisions of a merger agreement. Nevertheless, the resulting compromises often fall within a known universe of options.

In the Gibson Dunn Winter 2013 M&A Report, we examine many of the provisions at the center of such negotiations. We have compiled data relating to a target’s ability to negotiate with an alternative bidder, the requirements to be met before a target board can change its recommendation, each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and the consequences of such a termination. Our data pool consists of 59 merger agreements filed with the Securities and Exchange Commission during 2012 reflecting transactions with an equity value of $1 billion or more.

The full Gibson Dunn Winter 2013 M&A Report is available here.