MERGER BREAKUP FEES: A CRITICAL CHALLENGE TO ANGLO-AMERICAN CORPORATE LAW

Law and Policy in International Business, Spring 2003 by Tarbert, Heath Price

A more restrictive version of the no-shop clause is usually referred to as a "no-talk" provision. Under the typical no-talk provision, the bidder is not permitted to "respond to competing bids, hold discussions with [any] competing bidder, or enter into [any] agreement with [any] competing bidder," even if the target does not originally solicit the bid.36 Rather than merely prohibiting targets from inducing auctions, these provisions are designed to foreclose the possibility of flirtation altogether. This type of protection makes it nearly impossible for an outsider to lure one of the merger partners into an alternative friendly deal, leaving a hostile-style takeover as the only choice for facilitating a business combination. Unsurprisingly, some courts have found these contractual obligations to be a little too friendly between the negotiating boards and entirely too unfriendly for shareholders to whom the boards owe traditional fiduciary duties. In a recent Delaware decision, the court condemned a no-talk provision as "the legal equivalent of willful blindness, a blindness that may constitute a breach of the board's duty of care . . . ."37 Yet similar restrictions have been upheld by the same court, leaving little guidance for lawyers drafting merger agreements.38

The uncertain response of courts to deal protections has prompted the somewhat conservative legal profession to craft overarching provisions protecting such deal protections themselves, known as "fiduciary outs." Fiduciary outs essentially allow parties to include the aforementioned restrictions in merger agreements with the limited ability to abandon such protections if failing to do so would result in the directors breaching their fiduciary duties to shareholders. The events that trigger such an "out" can range from being fairly broad to extremely narrow but generally "the more severe the device[s], the broader the out must be."39 The mere receipt of a superior offer by a third party can suffice at the broadest end of the spectrum, while other "outs" may require a written legal opinion attesting that the devices now place board members in breach of their statutory and common law obligations to shareholders. The exercise of a fiduciary out excuses a merger partner from the restriction yet "will not constitute a breach" of the friendly merger agreement.40 Fiduciary outs, however, are not free.

A typical fiduciary out does not permit avoidance of the most popular deal protection, the breakup fee, but rather often triggers its very operation. Because of this and other unique attributes, breakup fees present the most difficult case for an Anglo-American analysis of deal protections in the friendly merger environment.

D. The Breakup Fee as a Deal Protection Device

Compared to other deal protections, the breakup fee is mechanically simple. Yet as this Article shows, this very simplicity has paradoxically made this device the most complicated deal protection dilemma currently facing U.S. and U.K. practitioners, judges, and legal scholars. Breakup fees are essentially fixed payments paid by one merger partner to another pursuant to specified conditions resulting in a planned merger failing. In a typical scenario where Bidder One enters into a merger agreement with the Target, who is then courted by Bidder Two, the "Target agrees to pay Bidder One a fixed amount if, for any enumerated reason, the merger is not consummated."41 Yet during the past few years, there has been an increase in reciprocal breakup fees, making this deal protection device almost as likely to be used by bidders as targets to protect the deal.42 This device is known on both sides of the Atlantic by a variety of names, the most common being "breakup or break fees," "termination fees," "inducement fees," "bust-up fees," and "drop-dead fees." Economic research indicates that of all of the deal protection devices proliferating in the friendly merger market, breakup fees "have proven most popular over time, and were deployed in almost 70% of deals in 1998."43