Some public companies — particularly those in sectors that have been hit hard by COVID-19 and the collapse of energy prices — may be thinking seriously about an MBO or similar “take private” transaction. If you have a client that is exploring this option, check out the recent Hunton Andrews Kurth memo. It provides an overview of the federal securities law & state fiduciary duty issues associated with a take private deal, and discusses how the need to manage those issues will affect the transaction process.
Here’s an excerpt on structuring a competitive bidding process in the absence of a controlling shareholder:
In a take private transaction effected by a controlling stockholder, the target company may not have viable third-party alternatives, as the controlling stockholder may not be a willing participant in any such transaction. Nevertheless, it will be important for the Special Committee to discuss with its advisors the practicality of soliciting third-party alternatives and to assess the controlling stockholder’s interest in supporting third-party transactions.
Outside the controlling stockholder context, the Board or Special Committee has a variety of options to discharge its fiduciary duties in obtaining the best price reasonably available for the stockholders, as further discussed below. This is typically done through a “market check.” In some M&A transactions, the Board may choose to negotiate with a single bidder and then rely on a post-signing market check (sometimes referred to as a “window shop”) in which the Board can respond to bona fide unsolicited proposals and exercise its “fiduciary out” to recommend a superior proposal prior to the stockholder vote or completion of the tender offer. In the take private context, however, Boards and/or Special Committees may opt to conduct a pre-signing market check (i.e., a sale process) or facilitate a post-signing market check through a “go-shop” process.
A “go-shop” refers to a provision in the merger agreement that allows the target Board to solicit alternative bids and freely discuss a transaction with any third-party buyer during a limited period of time. Delaware courts have held that an effective go-shop provision can promote a competitive bid process. The “go shop” provision must permit a meaningful opportunity for the target to search for higher offers, and the target typically commences the “go shop” process by including a reference to the “go shop” provision in the press release announcing the execution of the merger agreement with the take private bidder.
The memo also reviews alternative transaction structures, federal disclosure requirements, the standards of review that the Delaware courts may apply to the transaction, the factors that will be used to determine whether a controlling shareholder or control group is present, and the use of special committees to mitigate conflicts of interest.
-John Jenkins, DealLawyers.com June 15, 2020
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