Exclusive Merger Agreements and Lock-Ups in Negotiated Corporate Acquisitions

90 Pages Posted: 10 Jun 2002

See all articles by Stephen M. Bainbridge

Stephen M. Bainbridge

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


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.

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

JEL Classification: K22

Suggested Citation

Bainbridge, Stephen Mark, Exclusive Merger Agreements and Lock-Ups in Negotiated Corporate Acquisitions. Available at SSRN: https://ssrn.com/abstract=310243 or http://dx.doi.org/10.2139/ssrn.310243

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

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