A merger agreement, sometimes referred to as an “Agreement and Plan of Merger”, is defined as a legal contract governing the combination of two or more companies into a single entity. This is considered one of the most important documents available in mergers and acquisitons and traders MUST be able to access it, read it and understand the information contained within be fore embarking on a merger arbitrage investment strategy. Some of the most important areas covered in the document will include
- Liability
- Employment
- Valuation
- Intellectual property (IP)
- Tax
- Legal
- Business operations
Failure to conduct proper due diligence regarding these areas is likely to increase the risk to the shareholders and could possibly result in a failed transaction.
In transactions involving large companies with a large shareholder base, a shareholder representative may be present in the merger negotiations to represent their interest. This could be one of the majority shareholders or it could be a professional firm, possibly a proxy advisory firm acting on their clients behalf.
An Example of a Merger Agreement
On November 25, 2019, LVMH and Tiffany & Co. (TIF) announced that the companies have entered into a definitive agreement whereby LVMH will acquire Tiffany for $135 per share. The merger agreement was simultaneously filed as part of an 8-K with the SEC and can be viewed in its entirety here. The following excerpt discusses the fate of the merger sub.
ARTICLE II
THE MERGER; CLOSING; EFFECTIVE TIME
2.1 The Merger. Upon the terms and subject to conditions set forth in this Agreement, and in accordance with the applicable provisions of the DGCL, at the Effective Time, Merger Sub shall be merged with and into the Company, whereupon the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation in the Merger (the “Surviving Corporation”) and a Wholly Owned Subsidiary of Parent.
The merger agreement is all encompassing and covers every aspect of the union. By some accounts it is a short document at just over 70 Pages long. The price and consideration of the deal are not included in the agreement and instead can be found in the accompanying press release. Issues to resolve include whether cash upfront will be required for the entire purchase price, liquidation preferences, voting rights, board rights and responsibilities, registration rights, and transferability restrictions.
