Emerging Trends In Deal-Protection Techniques

Originally published in IDD Magazine, October 2006.

The rationale for deal protection is clear, and this attorney takes a look at recent developments in this area.

It has become common practice to include a "fiduciary out" in negotiated merger transactions. When directors of a target authorize these transactions and bind the company to support them, they are, at least to some degree, usurping for themselves a power that ultimately belongs to the shareholders — namely, the right to choose when and to whom to sell control. By agreeing to restrict the ability of the company to pursue and consummate alternative transactions, the directors are limiting their ability to act in what might later emerge to be the best interests of the company’s shareholders. The introduction of the "fiduciary out" balances this by permitting the directors of the target to withdraw their recommendation of the negotiated transaction and terminate the agreement.