By: Carl F. Barnes

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M&A deal protection measures, such as requirements for exclusive negotiations, no-shop provisions, break-up fees, matching rights and other devices, have long been accepted by the Delaware courts — as long as they do not unreasonably preclude potential bidders who might otherwise want to top an existing offer and provide greater value to a target’s stockholders.

Although no one deal protection measure can be analyzed in a vacuum, and each measure must be considered in the context of other protection devices adopted in the particular deal, the Delaware courts routinely find that break-up fees in the range of 3-4% of the transaction’s equity value are not unreasonable. In smaller deals, break-up fees may be even higher. The Chancery Court in In re Answers Corporation Shareholders Litigation, Consol. C.A. No. 6170-VCN (April 11, 2011), for example, called a break-up fee equal to 4.4% of equity value “near the upper end of a ‘conventionally accepted’ range,” but noted that, in the context of a “relatively ‘small’ transaction” such as Answers, “a somewhat higher than midpoint on the ‘range’ is not atypical.” And the Court in In re The Topps Company Shareholder Litigation, Consol. CA. No. 2786-VCS (June 14, 2007), determined that, although a break-up fee, including payment of the bidder’s expenses, of 4.3% was “a bit high in percentage terms,” it was “explained by the relatively small size of the deal.”

Against that background comes the recent Chancery Court decision in In re Comverge, Inc. Shareholders Litigation, Consol. C.A. No 7368-VCP (November 25, 2014). Here, in a challenge to a completed merger, the plaintiffs alleged, among other things, that the board of directors of the target Comverge, Inc. had breached their fiduciary duty by agreeing to a break-up fee of as much as 13% of Comverge’s equity value. How’d that happen?

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Originally posted by Morse, Barnes-Brown & Pendleton on February 20, 2015 at 1:00pm