W I T N E S S E T H:

The Twitter Merger Agreement and Its Likely Precedent Document

The Twitter v. Musk litigation has probably focused more public attention on a merger agreement than has ever occurred before. The interpretation of the agreement in the case may decide how $20-30 billion worth of value is allocated, as between Musk and Twitter shareholders.

In interpreting the agreement, it is often helpful to know where it came from. Deal documents such as merger agreements are not written from scratch; instead, they are copied from prior deals and modified for the present transaction. In my research, I often trace the lineage of deal documents that results from this copying, with a particular focus on merger agreements, so I thought that experience might be helpful here.

I ran the Twitter Merger Agreement through a large corpus of prior merger agreements that I maintain. The analysis uses word-for-word comparisons similar to those used in plagiarism software to find the likely precedent document. The closest prior merger agreement was the merger agreement from the Stone Point Capital acquisition of CoreLogic, which was executed as of February 4, 2021. That agreement can be found here.

My database of merger agreements contains several thousand agreements from the last four years, but it isn't exhaustive. Accordingly, although it is likely that the CoreLogic document was the precedent for the Twitter agreement, it is not certain. Also, if the CoreLogic agreement was the precedent, the parties made substantial changes in the Twitter deal that may shed light on their intent.

In subsequent posts, I will likely analyze some of the key similarities and differences between the two agreements.

 

Unearthing the Household International poison pill

In the course of a project I'm working on related to "rights agreements" (poison pills), I discovered that the ThomsonOne service has some limited availability of paper filings from the pre-EDGAR era. I searched for the earliest poison pills and was unable to find them for Lenox and El Paso (believed to be the first poison pills). However, I found the one from Household International that was the subject of the landmark Supreme Court case validating the poison pill (Moran v. Household International).

I uploaded here a  copy of the 8-A filing with the pill document attached in case readers are interested in delving into this little piece of M&A history. I inserted below the first page of the pill from the document. Many of the terms are almost verbatim identical to those used today, with the exception that the Household Pill did not contain the now-standard "flip in" feature.

Required Tax Reading for Mergers & Acquisitions Lawyers

In researching some M&A tax issues today, I came across an article in the Penn State Law Review, Basic Tax Issues in Acquisition Transactions by Michael L. Schler of Cravath, Swaine & Moore LLP. This is the best summary I have seen of tax issues in M&A designed especially for corporate lawyers. This (relatively) short article provides an excellent overview of what corporate lawyers need to know to represent clients effectively in M&A transactions. 

This article should be required reading for every new transactional associate. Corporate lawyers who practice in M&A should have a basic understanding of the tax issues that so often drive the transaction structure. I tell my students only half jokingly that the job of the transactional lawyers is to not mess up what really matters, which is the tax treatment of an acquisition. Although corporate lawyers generally will not be responsible for opining on the tax treatment of a transaction, they will be at least jointly responsible for accurately documenting the transaction and describing the tax treatment in disclosure documents, and an understanding of the basic issues is essential.

I had the pleasure of meeting Mr. Schler at the Pepperdine Law Review's tax symposium a few weeks back, and was impressed by his command of tax policy in addition to tax details. His article is evidence that  law review articles can be actually useful to practitioners, at least when written by them...

Merger Agreement Promises to Oneself

Last week saw the blockbuster $28 billion acquisition of H.J. Heinz by Berkshire Hathaway and 3G Capital. The merger agreement, filed on Friday, provides a revealing glimpse into the issues that corporate managers think are important in acquisitions and, not surprisingly, many of those issues are unrelated to securing the best value for public shareholders of the target.

In particular, the merger agremeent contains a bevy of promises about various social issues related to Heinz, including a "Company Heritage" clause that provides:

"Preservation of Company Heritage. From and after the Closing, Parent shall cause the Surviving Corporation to preserve the Company’s heritage and continue to support philanthropic and charitable causes in Pittsburgh and other communities in which the Company operates, including honoring the charitable commitments set forth on Section 7.15(c) of the Company Disclosure Letter, in each case in a manner and amount consistent with past practice."

The clause appears to have been copied almost word-for-word from the merger agreement from the 2008 acquisition of Anheuser-Busch, with St. Louis simply crossed out and Pittsburgh written in, along with a few minor changes. The Anheuser-Busch deal was an even bigger bonanza of social issues, in which the agreement (among other things) required the acquirer to "reaffirm" its "commitment" to the the "three-tier distribution system" for alcohol. Why the Anheuser-Busch shareholders (who were being cashed out) should have cared whether the acquiring company pledged allegiance to a paternalistic, anti-competitive relic from the Prohibition era is a mystery to me, but apparently the pledge was important to management.

In the Heinz deal, the acquirer was not required to swear its eternal devotion to Prohibition-era policies, but did agree to maintain the Heinz name, to continue charitable and philanthropic activities, and to keep the headquarters in Pittsburgh (forever?) Indeed, the "Chairman, President, and Chief Executive Officer" (all the same person)  reportedly said he told the acquirers at the outset that "Pittsburgh was nonnegotiable." Although I'm sure that negotiating stance was appreciated in Pittsburgh, it might lead Heinz shareholders to wonder what considerations were paramount in the boardroom. So no matter how much money an acquirer offered to move away from Pittsburgh or change the name of the company, the CEO would simply not entertain any such proposal? Perhaps that is the case; indeed the absence of a "go-shop" provision and other factors lead some experts to wonder whether Heinz managment consciously limited its options, possibly failing to get the best price for the public shareholders (e.g., you and me).

It turns out, however, that these clauses may not really constrain the acquirer much, and therefore may not have required the shareholders of Heinz to give up much. It appears that the social clauses in the agreement are merely textual embroidery with no real legal consequences, and therefore no consequences for the financial markets. This is because even if an agreement to preserve "company heritage" were not too vague and indefinite to enforce in court, who is supposed to enforce it after closing? The survival clause in Section 10.01 carefully specifies that post-closing covenants (such as this one) remain in effect after closing. But the only parties to the agreement are the merging companies, and after the merger Heinz will be a wholly owned subsidiary of the acquirer. It seems unlikely the acquirer will cause its subsidiary Heinz to bring a lawsuit against the acquirer for betraying the "company heritage" after the closing.

As for third-party beneficiaries who might be able to enforce the provision, Section 10.09 makes it clear there are none who could protect the "company heritage." One might think this was just an overlooked provision near the end of the agreement, but of course the managers did not forget to make themselves third-party beneficiaries of the indemnification provisions in that provision. Perhaps more telling is that there is no time limit to the obligation, suggesting the acquirer didn't think it would really be constrained by the promise. It is unlikely the acquirer would agree to maintain the corporate headquarters in Pittsburgh into eternity unless it had serious doubts about whether the clause was actually enforceable. It seems that the parties deliberately wrote an unenforceable provision into the agreement, perhaps to try to avoid agitating local politicians or other interests.

In a sense, then, the parties here have used the merger agreement to make a series of unenforceable promises to and by themselves, and with no shareholder-oriented purpose. The shareholders of Heinz are being cashed out--they have no continuing interest in this company--so management cannot purport to be preserving shareholders' interests by negotiating this clause. How does this provision help the shareholders of Heinz, who presumably are giving up some amount of extra cash consideration in order to promise to keep the company headquarters in Pittsburgh and to preserve the "company heritage"? Or perhaps the shareholders aren't giving anything up because the acquirer would have honored this "heritage" anyway, making the promise doubly unnecessary. It seems likely that both parties knew this is a unenforceable clause. So why make such a promise if it cannot realistically be enforced?

One seems compelled to conclude that this was just aesthetic embellishment, designed to mollify the various constituencies in the corporation that otherwise go berserk when a company comes under new ownership. Why else would Heinz management demand a promise from the acquirer to the acquirer's subsidiary after the merger to preserve "company heritage" and Pittsburgh offices? If I were a shareholder of Heinz, I might ask why management would make a "nonnegotiable" social demand that, if anything, harms the value to be received by Heinz shareholders in the merger. If I were an employee or other non-shareholder who has an interest in Heinz, I might ask why managers didn't write in a mechanism to make the social clauses enforceable, as did Ben & Jerry's in its merger agreement. The Heinz clause, lacking a realistic enforcement mechanism, has the potential to lull the non-shareholder constituencies into a false sense of security so they won't oppose the acquisition. 

Of course, the board is not likely to face any serious legal challenge from the decision to simultaneously prioritize issues other than shareholder value and potentially mislead the other supposed beneficiaries of the social issues provisions. Heinz is incorporated in Pennsylvania, and as Professor Guhan Subramanian has documented, Pennsylvania (along with Ohio and Massachusetts) has among the most "overreaching" anti-shareholder, pro-manager laws in the country. As for the other constituencies, Pennsylvania has not gone so far (yet) as to imply a fiduciary duty to them, so management will not have any liability for negotiating a clause with no enforcement mechanism. Thus, the promises of this agreement are basically just promises to oneself, a corporate form of "New Year's resolution," with perhaps the same dubious staying power.