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Exclusive Merger Agreements and Lock-ups in Negotiated Corporate Acquisitions


Stephen M. Bainbridge


University of California, Los Angeles (UCLA) - School of Law


Minnesota Law Review, Vol. 75, Pp. 239, 1990

Abstract:     
In any negotiated corporate acquisition, there is a substantial risk that the deal will not be consummated. Changes in the business environment occasionally may lead the target board to renege. Another party may approach the target board with an alternative, presumably higher-priced, acquisition proposal; indeed, target management might initiate negotiations with a second party before presenting the initial bid to the shareholders. Alternatively, a competing bidder may directly present its proposal to target shareholders by making a tender offer for their shares. The exclusive merger agreement is intended to discourage the target board from reneging on the merger agreement or, at the least, to reimburse the initial bidder's up-front costs if the deals does not go through. The operative provisions of exclusive merger agreements may be conveniently divided into two basic categories: performance promises, such as a no-shop agreement; and lock-ups and cancellation fees. Any analysis of such provisions must begin with a recognition that there is a potential conflict of interest in all negotiated acquisitions. This article contends that the standards of review courts apply to exclusive merger agreements have failed to adequately address that conflict of interest. Accordingly, this article proposes a framework for analysis of such provisions. Specifically, the article explains that performance promises should be routinely enforced. In contrast, lock-ups and cancellation fees should be more closely scrutinized. Indeed, as a prophylactic measure, the article proposes that lock-ups or cancellation fees exceeding 10 percent of the transaction's value generally should be invalidated.

Number of Pages in PDF File: 90

Keywords: merger, stock lock-up, asset lock-up

JEL Classification: K22

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Date posted: June 10, 2002  

Suggested Citation

Bainbridge, Stephen M., Exclusive Merger Agreements and Lock-ups in Negotiated Corporate Acquisitions. Minnesota Law Review, Vol. 75, Pp. 239, 1990. Available at SSRN: http://ssrn.com/abstract=310243 or http://dx.doi.org/10.2139/ssrn.310243

Contact Information

Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
310-825-6023 (Fax)
HOME PAGE: http://www.professorbainbridge.com
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