General M&A

Question 1

What is information asymmetry in M&A?

Answer 1

A situation where one party has more or better information than the other, leading to adverse selection and moral hazard issues.

Information asymmetry can distort pricing and participation in transactions.

Question 2

Define due diligence in the context of M&A.

Answer 2

The process of investigating a business before signing a contract, to ensure correct valuation and assess risks.

Due diligence often involves reviewing financial records, contracts, and other pertinent information.

Question 3

What are reps and warranties?

Answer 3

Contractual assurances made by the seller regarding the truth of certain facts about the business being sold.

They allocate risk and encourage disclosure in M&A transactions.

Question 4

What do MAC clauses stand for?

Answer 4

Material Adverse Change clauses, which allow a buyer to back out of a deal if significant negative changes occur before closing.

MAC clauses can help manage risk by specifying conditions under which a buyer can withdraw.

Question 5

What are earnout clauses?

Answer 5

Contract provisions that make part of the purchase price contingent on the future performance of the target company.

Earnouts align incentives but can introduce risks like dispute over performance metrics.

Question 6

What is the purpose of third-party verification in M&A?

Answer 6

To provide credible assurance regarding the information disclosed by the seller, helping to mitigate information asymmetry.

Deal advisers often play this role to enhance buyer confidence.

Question 7

True or False: Auctions can help resolve information asymmetry.

Answer 7

True

Auctions allow buyers to compete for assets, which can lead to more transparent pricing.

Question 8

What are the economic problems associated with M&A deals?

Answer 8

• Uncertainty
• Information asymmetry
• Adverse selection
• Moral hazard
• Agency problems
• Unverifiable information

These issues complicate negotiations and can lead to inefficient market outcomes.

Question 9

What is the main goal of SPA drafting in M&A?

Answer 9

To achieve efficient contract design and production while balancing the interests of both parties.

SPA stands for Sale and Purchase Agreement.

Question 10

Fill in the blank: _______ clauses are used to manage risks related to unforeseen events in M&A contracts.

Answer 10

Force majeure

Force majeure clauses can protect parties from events beyond their control, such as natural disasters.

Question 11

What is the significance of covenants in M&A contracts?

Answer 11

Covenants are promises made by one party to another, often relating to the operation of the business during the transaction period.

They help maintain the status quo and prevent value dilution.

Question 12

What does the term ‘locked box pricing’ refer to?

Answer 12

A pricing mechanism where the price is fixed at a certain date, and the seller is responsible for any changes to the business until closing.

This approach can simplify price adjustments compared to completion accounts.

Question 13

What are the risks associated with earnout periods?

Answer 13

Potential manipulation by buyers and behavioral problems that can arise during the earnout period.

These risks can create conflicts between buyers and sellers regarding performance expectations.

Question 14

What is the role of warranties and indemnities in M&A?

Answer 14

They are essential tools for managing risk, providing assurances to buyers and allowing them to recover losses if those assurances prove false.

Warranties cover general risks, while indemnities focus on specific known liabilities.

Question 15

Define the concept of adverse selection.

Answer 15

A situation where sellers have more information about the quality of the asset than buyers, leading to inefficiencies in the market.

This is often illustrated in markets like used cars, where low-quality products dominate.

Question 16

What does the incomplete contracts theory suggest?

Answer 16

That lawyers can help bridge the gap between real-world contracts and the ideal of complete contracts through careful drafting.

This theory emphasizes the importance of addressing uncertainty and risk in contract design.

Question 17

What is the relationship between reputation and successful negotiation in M&A?

Answer 17

Reputation, transparency, and long-term relational trust are crucial for successful negotiations, especially when full information is not available.

Trust can facilitate smoother deal processes and mitigate risks.

Question 18

What is the investment theory of MAC clauses?

Answer 18

The view that MAC clauses incentivize sellers to make value-enhancing investments before closing rather than just protecting buyers.

This theory suggests that MAC clauses can promote cooperation between buyers and sellers.

Question 19

What changes in M&A contract design were observed during the COVID-19 pandemic?

Answer 19

Increased emphasis on ordinary course covenants and pandemic-specific MAE carveouts.

These changes reflect the need for flexibility in uncertain conditions.

Question 20

What are behavioral problems in the context of M&A?

Answer 20

Issues that arise between signing and closing, such as misaligned incentives or actions taken by either party that could affect the deal.

These problems can complicate the transaction process and lead to disputes.

Question 21

What are the behavioural problems associated with the common-time-horizon assumption in M&A?

Answer 21

Failure of the common-time-horizon assumption can lead to behavioural problems during:
* Signing and closing
* Earnout period
* Completion accounts period

These behavioural issues can affect the parties’ incentives and contractual obligations.

Question 22

What are some contractual solutions to address behavioural problems in M&A?

Answer 22

Contractual solutions include:
* Covenants (e.g. ordinary course of business)
* MACs
* Price adjustment mechanisms (completion accounts vs locked box)
* Reps and warranties (‘bring-down’ condition)
* Earnout clauses
* Indemnification clause
* R&W or W&I insurance

These solutions aim to manage risks and align incentives among parties.

Question 23

What is the locked box model in private equity M&A deals?

Answer 23

In the locked box model, the purchase price is fixed at signing based on historic accounts, which:
* Transfers economic risk to the buyer from a specified date
* Eliminates price adjustments post-closing

This model is favored in the UK for its price certainty and clean exits.

Question 24

How does the post-closing adjustment (PPA) model differ from the locked box model?

Answer 24

The PPA model allows for:
* Purchase price adjustments after closing based on actual financials
* Greater protection to buyers but creates uncertainty for sellers

This model is dominant in the US private equity market.

Question 25

What challenges does Representation and Warranty Insurance (RWI) introduce in M&A transactions?

Answer 25

Challenges of RWI include: * Adverse selection * Moral hazard ## Footnote Insurers face difficulties because insiders know more than insurers, and buyers may conduct less due diligence.

Question 26

What was the outcome of the LVMH-Tiffany merger dispute concerning MAC clauses?

Answer 26

The dispute illustrated that MAC clauses are often used for: * Price renegotiations rather than actual exit routes * A reduced purchase price was ultimately agreed upon in settlement ## Footnote The case highlights the need for clearer drafting regarding pandemic-related MACs.

Question 27

What is the role of the Board Neutrality Rule in the EU Takeover Directive?

Answer 27

The Board Neutrality Rule prevents target company management from taking defensive actions against a takeover without: * Prior shareholder approval ## Footnote This rule is crucial in maintaining shareholder control over takeover decisions.

Question 28

What are the main concerns for bidder shareholders in M&A transactions?

Answer 28

Concerns for bidder shareholders include: * Overpayment risk * Agency costs * Dilution risk ## Footnote These concerns can significantly impact their investment and decision-making.

Question 29

What does the Mandatory Bid Rule (MBR) require in corporate takeovers?

Answer 29

The MBR requires that any acquirer of control must offer the same terms to all shareholders, ensuring: * Control passes to the most value-creating bidder * Prevention of deals based on private benefits ## Footnote This rule is seen as promoting economic efficiency.

Question 30

What is the significance of the Breakthrough Rule in the EU Takeover Directive?

Answer 30

The Breakthrough Rule weakens entrenched structural defenses such as: * Voting caps * Golden shares that can block takeovers ## Footnote This rule aims to facilitate takeovers by reducing barriers.

Question 31

What is the impact of the EU Takeover Directive on member states?

Answer 31

The Directive has led to: * Fragmented implementation across member states * Retention of strong anti-takeover defenses in some countries ## Footnote This has limited the harmonization of takeover regulations within the EU.

Question 32

What is the focus of Kershaw and Schuster’s article on company law?

Answer 32

The article argues for: * Corporate law to evolve for purpose-driven companies * Regulatory reforms for greater flexibility and protection against short-term pressures ## Footnote This reflects a shift towards sustainable performance and accountability.

Question 33

Fill in the blank: The UK Takeover Code’s non-frustration rule prohibits target company boards from taking any action that could ______ a takeover bid without shareholder approval.

Answer 33

frustrate

Question 34

True or False: The EU Takeover Directive mandates that all member states must adopt the Board Neutrality Rule.

Answer 34

False

Question 35

What are the concerns for target management in hostile transactions?

Answer 35

Concerns include: * Losing profitable employment * Short-term vs long-term value ## Footnote Target management may react defensively to protect their positions.

Question 36

What are the implications of the BM Brazil v Sibanye case on MAE clauses?

Answer 36

The case underscores: * The high threshold for invoking MAE clauses * Importance of objective grounds in decision-making ## Footnote It highlights the judicial scrutiny applied to such claims.

Question 37

What is the core idea of Jesper Lau Hansen’s paper on the Mandatory Bid Rule (MBR)?

Answer 37

A comprehensive critique of the MBR, arguing it is conceptually flawed and economically counterproductive. ## Footnote Hansen believes the MBR deters efficient takeovers and is not based on valid legal principles.

Question 38

What is the intended purpose of the Mandatory Bid Rule (MBR)?

Answer 38

To protect minority shareholders by requiring equal offers during a takeover. ## Footnote This is supposed to ensure that minority shareholders receive the same price as controlling shareholders.

Question 39

According to Hansen, what does the MBR reflect?

Answer 39

An irrational fear of controlling shareholders that undermines market efficiency. ## Footnote Hansen suggests that better protection for minority shareholders can be achieved through corporate governance mechanisms.

Question 40

What does Kershaw explain in his discussion of the UK’s mandatory bid regime?

Answer 40

The operation and logic of the mandatory bid regime under Rule 9 of the Takeover Code. ## Footnote This includes how the regime is triggered, structured, and sometimes avoided.

Question 41

What threshold is significant in Kershaw's discussion regarding creeping control?

Answer 41

30% shareholding threshold. ## Footnote Exceeding this threshold can trigger the mandatory bid regime.

Question 42

What are the strict terms of any resulting mandatory offer as outlined by Kershaw?

Answer 42

Price setting and minimal conditionality. ## Footnote These terms reinforce fairness and transparency in takeovers.

Question 43

What flexibility does the Takeover Panel have in Kershaw's discussion?

Answer 43

It can waive obligations for inadvertent threshold crossings or allow whitewash procedures. ## Footnote Whitewash procedures require independent shareholder approval.

Question 44

What is the core idea of Davies' handout on takeovers?

Answer 44

To provide a conceptual and comparative foundation for understanding why takeovers are regulated. ## Footnote It highlights the differences in regulatory approaches across jurisdictions.

Question 45

How does Davies define takeovers?

Answer 45

As control-shifting mechanisms often conducted via contractual offers. ## Footnote This definition contrasts with structural mergers.

Question 46

What frictions do takeovers create that regulation addresses?

Answer 46

Coordination problems among dispersed shareholders, agency issues, and opportunities for both efficient and inefficient transfers of control. ## Footnote Regulation helps mitigate these issues through various rules.

Question 47

What are the regulatory goals emphasized by different countries regarding takeovers?

Answer 47

* UK law protects shareholder primacy * US law grants managerial discretion * Germany and Japan incorporate stakeholder perspectives ## Footnote Each jurisdiction has its own approach to balancing value creation and limiting harmful transactions.

Question 48

True or False: The Mandatory Bid Rule is seen as a necessary protection for minority shareholders.

Answer 48

False. ## Footnote Hansen argues that it is unnecessary and unjustifiable.

Question 49

Fill in the blank: According to Kershaw, the mandatory bid regime seeks to prevent ________ takeovers.

Answer 49

stealth ## Footnote Stealth takeovers bypass full shareholder scrutiny.

Question 50

What can takeovers create through synergies according to Davies?

Answer 50

Value. ## Footnote However, they can also destroy value through mismanagement.