Until the current crises in the financial markets, negotiated acquisitions of public companies had been documented by a form of merger agreement which had evolved into an almost standard “seller friendly” template. This standard model agreement reflected the same factors which contributed to the vibrant M&A activity of recent years: readily available financing, rising stock markets, stable or improving economic and industry conditions, and high levels of confidence in business and financial fundamentals. Combined with the negotiating leverage provided to companies seeking to sell themselves by the generally large and seemingly ever-expanding universe of potential buyers, both strategic and financial, as well as sources of financing willing to assume syndication or underwriting risks, these factors resulted in merger agreements intended to provide sellers with a high level of certainty that a transaction would be completed. With the substantial erosion, if not disappearance of each of the factors underpinning the justification for the standard merger agreement, merger agreements should adapt to the new environment. Therefore, a new paradigm seems likely for acquisitions for cash in which the buyer does not have cash on hand sufficient to pay the acquisition price and any necessary refinancing of seller debt.

My firm has prepared a memorandum entitled “Negotiated Cash Acquisitions in Public Companies in Uncertain Times,” which considers how merger agreements may change as parties to transactions seek to allocate risks to closing and limit their liability. Written primarily by Peter S. Golden, with assistance from David Shine and me, the memorandum considers reverse break-up fees, forms of “seller financing,” material adverse change clauses, express financing conditions, buyer best effort covenants, ticking fees and other aspects of merger agreements that may adapt to the new M&A and financing climate.

The memorandum is available here.