Matching rights are the acquirer’s right under a purchase agreement to make a revised offer for target’s equity when target is faced with a competing bid or superior proposal. These rights allow the potential buyer to adjust their offer to compete with a better third party bid made during a specified time period.
As there is no strict definition of matching rights as each definition in each situation is unique. The term is often confused with the right of first refusal. In the case of ROFR, an acquirer has the first chance to make a purchase as opposed to matching right where the acquirer has the right to simply match an alternative bid in order to be successful. In some cases, matching rights are also used as a means to deter rival bidders and allow the acquirer to offer a lower than expected acquisition premium.
A Matching Rights Example
In the PREM14A filed by Pattern Energy (PEGI) on December 12, 2019, the reference to matching rights shows how they can have a dual purpose for the acquirer. Firstly, the fact that they exist may deter competing superior proposal. Rival bidders will have to offer a price that the Canada Pension Plan Investment Board (“CPPIB”) would not be able to match thus potentially inducing a case of winners curse.
that certain provisions of the Merger Agreement could have the effect of discouraging third parties from submitting competing acquisition proposals involving Pattern, including (a) the restrictions on Pattern’s ability to solicit proposals for alternative transactions involving Pattern and (b) Parent’s match right, as further described in “The Merger Agreement—Alternative Acquisition Proposals” beginning on page 113 of this proxy statement;
In this second quote from the same document, should a superior proposal be received, Canada Pension Plan Investment Board (“CPPIB”) will be notified. With this complete information about the rival bid, the CPPIB will be well placed to make a counter offer or decide to walk away from a bidding war.
We have agreed that we will promptly (and in any event within two business days) notify Parent if any inquiries, proposals or offers with respect to a Company Acquisition Proposal are received by us or any of our Representatives indicating, in connection with such notice, a copy of the terms and conditions of any proposals, offers or proposed agreements and the identity of the party making such Company Acquisition Proposal and thereafter will keep Parent reasonably informed, on a prompt basis, of the status and terms of any such proposals or offers (including by furnishing copies of any amendments thereto) and the status of any such discussions or negotiations.
This open line of communication between the acquirer and the target clearly gives an advantage to the current acquirer. If a rival bidder shows interest, they may be forced to offer a substantially higher price (more than considered usually sufficient) in order to deter further interest from the original buyer.
