December 11, 2008

Judging the Accuracy: ABA’s “2008 Strategic Buyer/Public Company Deal Point Study”

In our “Negotiation Tactics” Practice Area, we have posted the “2008 Strategic Buyer/Public Company Deal Point Study,” which was recently compiled by the Market Trends Subcommittee of the ABA’s Mergers and Acquisitions Committee. The study tests deal points found in agreements involving public company targets entered into during 2007 with transaction values in excess of $100 million – and
compares those deal points to the Subcommittee’s previous studies of agreements in 2004 and 2005/2006. Some of the new deal points evaluated in the Study includes “go-shops” in strategic deals, specific performance clauses and buyer match rights.

As noted by Keith Flaum’s entry on Harvard Law School’s Corporate Governance Blog:

Among the many interesting findings of the Study is that 48% of the acquisition agreements in the Study sample contained a non-reliance clause—a clause to the effect that the target is not making, and the buyer is not relying on, any representations regarding the target’s business except for the specific representations expressly provided in the acquisition agreement. By comparison, only 18% of the acquisition agreements for deals announced in 2005 and 2006 included a non-reliance clause.

So why the significant increase? One possible explanation might be found in the February 2006 decision of the Delaware Court of Chancery in ABRY Partners, and the extensive discussion of that case by leading M&A practitioners throughout the country. In ABRY Partners, Vice Chancellor Strine underscored the effectiveness of a non-reliance clause in limiting a buyer’s fraud-based remedies in the context of an acquisition of a privately-held company.

Even though ABRY Partners involved a privately-held target, the extensive discussion that followed also focused on the potential usefulness of non-reliance clauses in deals involving publicly-traded target companies. Then, in late 2007, the Tennessee Chancery Court decided Genesco, Inc. v The Finish Line, Inc. In that case, a non-reliance clause in the merger agreement was viewed by the Court as an important element in its determination that Finish Line failed to prove that the publicly traded target company, Genesco, fraudulently induced Finish Line to enter into the merger agreement.

My colleague, Rick Climan, former Chair of the Committee on Mergers & Acquisitions, who acted as special advisor on the Deal Points Studies, points out that some of the targets involved in the 52% of the acquisition agreements in the Study sample that did not include a non-reliance clause may nonetheless have enjoyed the protection afforded by a non-reliance clause, in those cases where such a clause was included in the confidentiality agreement between the buyer and the target. In fact, in Genesco, the Court pointed to non-reliance clauses in both the confidentiality agreement and the merger agreement to support its decision.

I’ve also wondered if practitioners placed much stock in the ABA’s popular deal studies. Here is a poll to see what you think:

Online Surveys & Market Research