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Private vs. Public Deals

Purchase and sale agreements can generally be divided into those used in public transactions (i.e. where the target, and possibly the acquirer, is a public entity) and those used in private transactions (i.e. the sale of a private company, a subsidiary, or selected assets of a public entity). The distinction is important because in the sale of public entity, there will be no continuing party to which the acquirer may have legal recourse for breaches under an indemnification (i.e. all representations and warranties expire at closing). For example, if there are large environmental liabilities that a private seller has failed to disclose to the buyer, the buyer may be able to claim compensation for these liabilities subject to the terms of the purchase agreement that indemnify the buyer for such liabilities. However, if the target is a public company, such recourse will not be available to the buyer because it would be impossible to claim compensation from thousands of disparate selling shareholders.

Private Transactions

Private transactions are defined, for the purposes of purchase and sale agreements, by the existence of a known, identifiable seller. This seller may be a corporate entity or a small number of shareholders, such as a group of financial sponsors jointly selling a portfolio company or a family selling its wholly-owned business. The key difference between a private and public transaction is the existence of a seller to indemnify the the buyer, or stand behind its obligations, following the transaction's close.

Exhibit 1.5 – Implications of Private Deals on the Purchase and Sale Agreement

Section   Implication
 
Execution Provisions   In a private transaction, it is easier for a portion of the purchase price to be withheld or deferred.
 
Representations and Warranties   Since private companies are not obligated to file public documents (e.g. annual reports and 10-Ks), buyers typically insist on more thorough disclosures at the time of sale. Therefore, reps and warranties are generally strong in a private transaction.
 
Post-Closing Indemnification   The seller(s) can be held responsible for hidden or undisclosed liabilities after closing. Indemnification may be coupled with an escrow account into which a portion of the purchase price is deposited to cover any such liabilities. The funds would be released from escrow after a specified period of time or upon the satisfaction of certain conditions.
 
Fiduciary Outs   In a private transaction, sellers can commit outright to sell the company, and there is generally no need for them to have a "fiduciary out" that would allow them to consider higher offers after signing (i.e. the Board has no obligation to shareholders to consider higher offers). Therefore, there is no need for a fiduciary out.
 
Break-Up Fees   In a private transaction, there is generally no break-up fee since most or all of the shareholders have already agreed to the transaction by signing the agreement and there is no ability of those shareholders to terminate the transaction in favor of a superior deal.

Public Transactions

The primary distinguishing feature of a public transaction is the dispersed ownership of the target entity. In a public transaction, there will typically be no identifiable party to stand behind the obligations of the target after closing. This limits the ability of a buyer to enforce any form of post-closing indemnification. Additionally, the transaction documents are generally drafted between an acquiring management team and a selling management team (or Board) for subsequent approval by the target (and sometimes acquirer) shareholders. In a private transaction, the contract typically is negotiated directly with the shareholders of the target. The fact that the contract in the public transaction is generally negotiated with target management and subject to shareholder approval creates a level of uncertainty not present in private transactions. Finally, a public company is also subject to ongoing disclosure requirements by the SEC. This means that there is a significant amount of information regarding the company in the public domain and available for analysis.

The table below sets forth the various sections of a purchase and sale agreement and describes how an agreement to acquire a public company differs from an agreement to acquire a private company:

Exhibit 1.6 – Differences Between Private and Public Agreements

Section   Differences Versus Private Agreements
 
Execution Provisions   Provide for the transfer of the target shares to the buyer in exchange for consideration and the ultimate merger of the target into the buyer or a subsidiary of the buyer.
 
Representations and Warranties   Typically more limited in scope and number due to pre-existing public disclosure requirements. Also, usually make reference to target's public filings as the basis for many of the reps and warranties.
 
Covenants   Typically more limited in scope and number due to pre-existing public disclosure requirements.
 
Conditions to Closing   Additional condition for successful shareholder vote.
 
Indemnification   Typically not present.
 
Termination Rights / Fiduciary Out   Additional termination rights based on negative shareholder vote or exercise of fiduciary out (i.e. the target Board's option to terminate the contemplated deal so that it can pursue a higher offer by another acquirer - this option is a protected right of public companies to help ensure that public shareholders receive the best value for their shares).
 
No Shop Provision / Break-Up Fees   Public companies (i.e. their management teams, Board, and advisors) are typically precluded from actively "shopping" the target once a deal is announced. Although they will normally retain the right to respond to unsolicited offers, this right is circumscribed by the purchase and sale agreement. Also, if the original deal is terminated due to another deal, a break-up fee (usually 3% or 4% of equity value) is generally payable when the competing transaction closes (can be payable when a competing transaction is signed up and the original deal is terminated).

A public merger can take the form of a true acquisition by one company of another, or more of a "merger of equals" transaction. While the merger of equals is not a technically defined term, it is generally used to refer to low-premium stock-for-stock transactions in which management and Board control of the new entity is shared fairly equally by the merging parties.

Exhibit 1.7 – Merger of Equals vs. Regular Acquisition

    Merger of Equals   Acquisition
 
Consideration  
  • Usually all stock
  • Usually no collars
 
  • Stock or cash
  • May include collars
 
Governance  
  • Companies split Board seats and share governance responsibilities
 
  • Buyer management and Board controls target
 
Representations and Warranties  
  • Parallel or "mirror image" reps and warranties
 
  • Broader reps by buyer
 
Fiduciary Out  
  • For both buyer and seller
 
  • Usually only for seller

There are two alternative methods for closing a public transaction after a definitive agreement is reached between the buyer and seller: a "one-step" merger and a "two-step" tender offer and merger:

sale process

The two-step tender offer, contrary to the implications of its name, is the quickest way to close a deal. In a tender offer, the buyer offers to acquire the public target's shares directly from shareholders at the acquisition price, which usually represents a premium to the market price. The tender offer must remain on the table for at least 20 days, and must be made in accordance with the Williams Act (involving Schedule TO and Form 14D-9). If more than 90% of the target's shareholders "vote" in favor of the deal by tendering (i.e. selling) their shares, then a "short form" merger can be executed, which usually takes just a few days. If the tender offer does not receive the required 90% approval of a short form merger, then proxy statements must be mailed for a formal shareholder vote. The two-step method is less common than the one-step method because public companies are usually widely held and achieving 90% approval can be challenging.

Target shareholders are made aware of a tender offer through announcements in financial newspapers and direct communications from the target entity. A tender offer may be made to add pressure to merger negotiations already in progress, or without warning in an unsolicited bid known as a "hostile takeover" attempt.

The one-step proxy statement path can take 8-10 weeks to obtain a shareholder vote, and is the more commonly used method. Typically, a majority vote in favor of the sale by the target's shareholders is required (although a supermajority may be required based on state law or a company's corporate charter). Note that if a buyer is issuing more than 20% of its shares as consideration in a transaction, then it must also seek shareholder approval under stock exchange rules.

Exhibit 1.8 – Comparison of Methods for Closing the Acquisition of a Public Target

    One-Step   Two-Step
 
Advantages  
  • For target, more time for better offers to surface
  • Greater time to file SEC documents if stock issuance
 
  • Speed, particularly if cash deal
  • Potential to avoid formal target shareholder vote (instead, target shareholders "vote" by tendering their shares)
  • If 90% of target shares are tendered, can execute short form merger
 
Disadvantages  
  • Slower process - need to send out proxies and convene shareholder meeting to approve long form merger
  • Regulatory approval can slow the process
 
  • If less than 90% of target shares are tendered, longer process due to need for shareholder meeting to approve long form merger
  • Regulatory approval can slow the process

Occasionally, the buyer will make a two-tiered tender offer to acquire the target's shares that rewards shareholders for tendering their shares early. For example, the buyer might offer $15.00 per share to the first 50% of target shareholders who tender their shares, and $13.00 per share for shares tendered thereafter. The two-tiered tender offer is useful in a hostile bid because if the target's shareholders believe the bid will be successful, regardless of whether they tender early or late, they will tender early to ensure they receive the maximum consideration for their shares. However, if one or more large, perhaps institutional, shareholders own a large block of target stock comprising more than 10% of the target's outstanding shares, the tender offer's success may be less certain (recall that at least 90% of shares must be tendered for the offer to be successful) and shareholders might hold out in hopes of a better offer. In this latter case, the buyer or its investment bankers might first approach the large shareholder to gauge his/her willingness to accept the contemplated offer. In summary, the two-tiered tender offer will have the best chance of success when the target's shareholders are widely dispersed.

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