|
Preliminary agreements;
Memos of understanding; MOUs
Summary
|
 Infrequently
used in M&A context
- Especially in public company transactions -
because disadvantages to their use will usually
outweigh any advantage
Advantages
- Can start required waiting periods for
HSR Act clearance
- Can satisfy conditions to obtaining
financing commitments
Disadvantages
- Can slow down or complicate efforts
to
reach a definitive agreement
- Can trigger public disclosure
obligations,
before a definitive agreement is reached
- Can invite competing bids,
before a
definitive agreement is reached
- Can become an issue in subsequent litigation
- If contemplated transaction is not consummated -
based on claims of:
- Failure to perform a contract
- Breach of duty to negotiate in good faith
- Unjust enrichment
- Third party tortious interference with
contract
|
Typical Provisions
|
Description
of contemplated transaction
Proposed
price Exclusivity
("no shop") Confidentiality
Expense
reimbursement
Termination
date Summary
of other terms
- Representations and
warranties
- Indemnification
provisions
- Conditions to closing
Intent
of parties as to what provisions - if any -
are binding
|
Disclosure Obligations
|
Form 8-K Item 1.01 
Entry into a material definitive agreement
- As proposed, Item 1.01 would have covered
letters of intent /
other
non-binding agreements
- Would also have required filing of preliminary agreement
as a Form
8-K exhibit
- As adopted, non-binding agreements
aren't
expressly covered
- Can still trigger Item 1.01, in
some circumstances
- SEC has indicated that
confidentiality and exclusivity provisions generally should not
trigger Item 1.01;
but that binding provisions about
non-solicitation and break-up fees could
|
Notable Cases
|
 AIH
Acquisition v Alaska Industrial Hardware
- SDNY 2003:
-
Parties held to have entered into a
final and binding agreement
notwithstanding that
formal signatures had not yet been affixed
-
Lack of signatures was a "mere formality,"
given course of conduct
-
Parties had executed a commitment letter,
held exclusive negotiations,
plaintiff / buyer had incurred diligence
expense
-
"Final" agreements had been exchanged
-
Order grants specific performance
for sale of company
-
Illustrates importance of including
express statement that neither party will be legally bound unless and until
a contract is formally executed and delivered
- Vacates SDNY decision
- Vacatur of order granting specific performance of
the unsigned stock purchase agreement
- Vacatur of an earlier preliminary injunction
barring efforts to sell the company during the litigation
- Unpublished decision
Texaco
v Pennzoil 1984
SEC_CODE_REF_0090001192884
- $11 billion damage award against Texaco over its
tortious interference with Pennzoil's 1984 "memorandum of agreement" to acquire
a controlling interest in Getty Oil
|
Precedent
|
American
Real Estate Partners (C. Icahn) 2006
Sizeler
Property Investors 2006
MGM
/ Sony-led Consortium 2004
- MGM
/ Sony-led Consortium 2004
- Sony made a $150 million "unconditional non-refundable deposit" to help win
auction of MGM
- Sony
agreed that its consortium would agree to a draft merger agreement subject only to "clean-up" changes
- Deposit was only refundable if MGM entered into a transaction with a third
party or had a "material adverse change"
- Helped Sony to buy time for consortium to win auction
- Deposit was about 3% of purchase price
-
Deposit agreement
9.13.04
-
Transaction signed
9.23.04
Sony
Corporation / Bertelsmann AG 2003
- Non-binding letter of intent for Joint venture -
formation of new company
NBC
Universal - GE / Vivendi Universal 2003
- Letter of intent - exclusive negotiations for Joint Venture - formation of
new company
- Followed a well-publicized auction
|
|
