Is it common to obtain a memorandum
USINFO | 2013-11-15 11:59

Is it common to obtain a memorandum of understanding or undertaking from key shareholders to sell their shares? If so, are there any disclosure requirements or other restrictions on the nature or terms of the agreement?
 

A bidder commonly requests that significant shareholders and the target's executive officers enter into, concurrently with the signing of the merger agreement, tender or voting agreements obliging them to tender their shares or to vote in favour of the merger. All such agreements and their principal terms must be disclosed in Schedule TO or in the proxy statement (seeQuestion 14).

However, arrangements with key shareholders that fully lock up a transaction and preclude the board from pursuing a higher offer may be invalid and unenforceable. For example, a court found an arrangement to be invalid because it included both (Omnicare v NCS Healthcare (Del. 2003)):

• A voting agreement in which the majority shareholders agreed irrevocably to vote their shares in favour of a merger.

• A merger agreement that required the merger to be submitted to a vote of the shareholders despite the board's withdrawal of its recommendation of the transaction in light of a higher third party offer.

In contrast, a court held to be acceptable a voting agreement with majority shareholders that required those majority shareholders to vote against any alternative acquisition proposal for 18 months following the proposed transaction (Orman v Cullman (Del. 2004)). In that case, the proposed transaction was subject to "majority of the minority approval", which meant that it could not be completed unless a majority of the minority shareholders approved it. The court concluded that these arrangements were enforceable because the completion of the proposed transaction was not a "mathematical certainty".

 

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