Crown Jewels, Bear Hugs, and Squeeze-Outs
from
September/October 2005
by Lisa Ferri
Given the boom in mergers-and-acquisitions activity, directors need to speak the lingo that rolls off the tongue of every M&A wheeler-dealer. The entries below were culled from the American Bar Association’s forthcoming Dictionary of M&A Terms with translation help from Leigh Walton, a partner in the Nashville office of Bass Berry & Sims PLC.
Bear hug
An unsolicited bid sent to the board of a company targeted for takeover. On the surface, it’s a proposal for a friendly acquisition (the “hug” part). In reality, it’s meant to put pressure on the directors to negotiate with the would-be buyer.
Bootstrap
How a bidder without much cash or sufficient financing tries to grab a company that has a great deal of cash and borrowing capacity. If the deal goes through, the cash-poor, financing-poor buyer puts up very little and instead borrows what he needs, using the target’s assets as security.
Crown-jewel lockup
If a company favors one would-be acquirer over another, it might implement a “crown-jewel lockup,” tying up its most valuable asset to keep it out of the hands of the unwanted buyer. The risk: A crown-jewel lockup may be viewed as an improper defensive measure under the Unocal rule (see below).
Unocal rule
Faced with a hostile takeover, a board must toe the line between a reasonable defense and a preemptive overreaction. The name comes from the Unocal case in which a judge ruled that the oil company’s board had the power and duty to oppose a bid by Mesa Petroleum. Mesa’s bid had been front-loaded, offering a much higher price to a minority of shareholders in order to gain control of the company. The ruling made clear, however, that the board should not take defensive measures against an offer deemed fair and reasonable.
Fiduciary out
A provision in acquisition agreements that lets the seller get out of an otherwise binding legal contract if a better offer appears.
No-shop provision
A contractual provision prohibiting the target company from soliciting a better offer once a sale has been agreed upon but before the deal either is done or has fallen through. When the buyer and seller have reached an agreement and the Revlon duty (see below) is satisfied, the no-shop provision kicks in and the seller is prevented from soliciting better offers. But wait! If an unsolicited offer arrives, the seller may negotiate with the new, higher bidder provided there’s a “fiduciary out” in the contract.
Revlon duty
Directors of a company that is being sold must get the highest price they can. Not as obvious as it seems. The name comes from the 1985 sale of Revlon, in which the board at first accepted a lower offer than the one put forth by financier Ronald Perelman. He went to court—and won the company.
Squeeze-out merger
A merger aimed at eliminating minority interests in an acquired company. To accomplish this, the small shareholders are paid off after the merger, in cash, at fair market value.
Stalking horse
An M&A decoy. A company hoping to sell itself might use a “stalking horse”—an ally in the form of another company that pretends it’s an interested buyer as a way to start a bidding war. Named for a decoy horse that a hunter hides behind while stalking game.
Two-step deal
The first step is usually a tender offer by which the bidder gains control of the company, followed by the second step: a “squeeze-out merger” (see above) by which the bidder obtains the balance of the shares. The advantage is that the first step—the tender offer for the majority of shares—can be done very quickly, and the second step—the minority squeeze-out—can be conducted in a controlled way.
Okay, now that you know the lingo, here’s a quiz:
Is the following statement true or false? A fiduciary out allows boards to negotiate with unsolicited bidders after the no-shop provision is activated, on the logic that the Revlon duty trumps the no-shop provision.
If you answered “True,” you’re ready to sling it with the best of them.
