DealLawyers.com Blog

My former Calfee Halter colleague Sam Totino recently published a blog addressing issues that sellers should keep in mind when considering rolling over a portion of their ownership interest in the target into a stake in the acquiring entity. This except discusses call option mechanics:

An entire article could be dedicated to “call option” mechanics that are included in nearly all equityholder agreements of a buyer. However, in short, a “call option” is an option available to the buyer to repurchase the equity of the buyer held by a rollover seller in certain circumstances (often triggered by a termination of employment of the seller post-closing). While a full discussion of all the nuances of the mechanics of a call option is beyond the scope of this article, this is one area where sellers really need to pay attention to avoid ending up in a situation the seller may not have bargained for at the time the deal closed.

Buyers can use a call option as a future negotiating tool and a significant source of post-closing leverage over a seller, given that the consequences of exercising the call option may lead to less than desirable outcomes for the seller (for example, the potential in some circumstances for repurchasing the buyer equity held by the seller at a purchase price less than fair market value, the ability to pay any purchase price over an extended term of years, etc.).

While certain rollover sellers may have the leverage to negotiate an elimination of the call option, that may not be possible for many (most) sellers. Therefore, careful consideration should be given to call option mechanics to ensure that, at the very least, the seller understands the “rules of the game” and appropriate limitations on the buyer’s ability to exercise the call option are included where possible.

The blog also highlights the reasons why buyers and sellers may find an equity rollover to be an attractive option and addresses points sellers should keep in mind when it comes to preemptive rights, tag-along rights, and information rights.

– John Jenkins