What Is a Support Agreement M&a
- Op april 14, 2022
- Door Jouke
- 0
In 2003, the Delaware Supreme Court ordered a one-step merger between Genesis Health Ventures and its target company, NCS Healthcare, in the Omnicare case. The court held that the directors of ncS were prevented from exercising a continuing obligation to exercise their fiduciary duties after the announcement of the merger agreement because (1) the board of directors approved voting rights agreements with NCS shareholders who held more than 50% of the outstanding voting rights, thereby securing approval of the merger at NCS`s general meeting; (2) The merger agreement contained a voting force provision requiring NCS to hold a shareholder vote despite any change in the recommendation of NCS`s board of directors on the merger (including with respect to competing offers). and (3) the merger agreement did not contain a “fiduciary exit”, i.e. a right of NCS to terminate the merger agreement in order to accept a superior competing offer. In other words, the directors of ncS had their hands tied – at the time of signing, the agreement was a fait accompli with respect to all superior offers that were subject only to a procedural vote of shareholders and the usual closing conditions. Such a scenario, the Delaware Supreme Court ruled, was in itself illegal, regardless of a robust auction process or even the demand of majority shareholders. 4In the year in which Article 251(h) contained a restriction for interested parties, commentators noted that Article 203 of the DGCL, from which the definition of interested shareholders in Article 251(h) was derived, defines the `ownership` of 15% of the outstanding shares of a company to such an extent that a support agreement could provide a purchaser with ownership of the shares of a counterparty shareholder. This violates the then applicable restriction 251(h). (flashback) At first glance, a two-tier buyer might differentiate their offering from Omnicare by avoiding support contracts altogether. Naturally, this was not the usual practice in Delaware two-stage mergers involving controlling shareholders, as a buyer in such contexts is likely to both increase the security of the business and signal to the market the support of the transaction from the majority-owning party or parties.
In a review of two-stage mergers of omnicare under Section 251(h) and Section 251(h) with targets of Delaware public companies with 50% or more majority shareholders [3], almost all of them (22 out of 24 transactions) included controlling shareholder support agreements. Thus, the predominant question for buyers of these stores was apparently not whether they should enter into support agreements, but what such agreements should look like. The prevailing reaction was to include a trustee in the merger agreement: in a majority of controllers dealing with support agreements (eight out of 22), majority shareholders pledged the offer or exchange of all their shares, unless the merger agreement was terminated, the merger agreement containing a target termination right to accept a global offer. and that termination was the only way to reduce or terminate the tendering obligation related to the exercise of a board`s fiduciary duties with respect to superior competing bids. Although the above-mentioned ultimate legal effect of an offer or exchange of shares is the same as the vote of those shares at a shareholders` meeting, the dynamics of an offer to exchange or acquire is fundamentally different from a discreet vote at a meeting or signature and approval. From the buyer`s point of view, to really stand in parallel with a voting force requirement, a supply force mechanism would have to formulate a clear referendum on the offer itself. Under SEC rules, offers must initially remain open for at least 20 business days and an additional 5 business days after material changes to an offer. Under these SEC rules, parties to the two-tier merger typically provide for the required initial offer period of 20 business days, and then a right of default for the buyer to extend the offer period thereafter for a few shorter periods until the merger agreement is terminated. In this process, all significant terms of the Offer will have a significant impact on the size of the interim offerings or shareholders` exchanges; For example, if an offer period otherwise ends with an antitrust waiting period still in effect under the Hart-Scott-Rodino Act, only a few shareholders, if everything is the same, will have deposited or exchanged shares, most of them waiting for the announcement of this condition. One would expect a buyer, especially when faced with an uncertain antitrust approval period or other uncertain condition, to push for a deadline to enforce the offer to be the time between a change in the board`s recommendation for a superior offer and a series of days after all the terms of the offer have been fulfilled, except (1) the offer or exchange of a minimum number of shares required to approve the merger and (2) these other terms. this could only be satisfied in the end. .