- A Delaware court case on Apollo
Tyres’ acquisition of Cooper Tire underscores
the importance of deal terms in US public company M&A
- Asian companies looking to US assets must
understand the US deal protection system as well as court
- In particular, it is very difficult for a buyer
to get out of a transaction – particularly if
they’re suffering "buyer’s
- Acquirers of US public companies must also
remember the board’s obligation to find the best
possible deal for shareholders;
- There are deal protection trends, such as
matching rights and 'force the vote’ covenants.
But standardisation of these terms is more common as they
might be challenged in court.
Recent disputes regarding Indian Apollo
Tyres’ acquisition of US-listed Cooper Tire
underscore why Asian corporates looking to the US must
understand its deal protection mechanisms and court
Apollo’s $2.5 billion acquisition of
Cooper, announced in June, has hit hurdles in China and the US.
Cooper has filed suit against Apollo and has appealed the
Delaware Chancery Court’s original ruling. The
case is pending in the Delaware Supreme Court.
But this also serves as a cautionary tale for Asian
companies looking to invest in the US. They must understand
deal protection mechanisms, especially how certain provisions
are viewed by the Delaware courts.
William Mills, a New York-based partner at
Cadwalader Wickersham & Taft said that broadly speaking,
Asian companies and inbound acquirers are more familiar with
the US M&A market and the deal protection system that it
has developed over the years.
"It’s well-known, well-established and
well-defined in the US, and Asian companies are seizing upon
that and using it just like any other acquirer would in the
US," he added.
Apollo’s acquisition of Cooper was announced in June for $35 a share, a 43% premium
to its current share price. But the deal soon ran into labour
issues in China and the US.
In July, more than 5000 workers at Cooper Changshan
Tire (CCT), the company’s joint venture (JV) in
China, went on strike to protest the deal. Chengshan asked a
local court to dissolve the JV, an action that the local government seemed to support. It was later
reported that Chengshan Group had considered a bid for Cooper.
Apollo also encountered US challenges. In August,
an arbitrator blocked the sale of two unionised
factories because the deal was negotiated without the consent
of the workers. Apollo has since been in negotiations with the
On September 30, Cooper shareholders voted in
favour of the acquisition. The next month, Cooper filed suit in the Delaware Chancery Court to
force Apollo to expedite its completion of the deal, alleging
that the company was dragging on union negotiations.
Apollo filed a pre-trial motion, saying that Cooper
did not satisfy the agreement’s 'reasonable
access’ provision by not providing access to its
China facility or records. It claimed it could walk away from
the deal because Cooper had not fulfilled its
covenant– a term not related to deal exit. The court
denied this motion because Apollo had not made a
request for access to these facilities, and said that the case
would have to go to trial.
In a November 8 letter, the court said Apollo did not breach its obligations
under the merger agreement, and refused to order the company to
complete the deal as it had until December 31 to broker an
agreement with the union. Cooper appealed the ruling, asking for an expedited plea
from the Delaware Supreme Court so that its case will be heard
before the merger agreement expires on December 31.
Cadwalader partner Jason Halper said the court
opinion is not that surprising, and is consistent with how
Delaware law has been understood.
"If you are a buyer and the court concludes that
you are looking for an out, it’s going to make it
very difficult for the buyer to get out under those
circumstances," he added.
A client note by the firm added that buyers are not
likely to be successful in avoiding an agreement by relying on
clauses in the merger agreement that are not typically intended
to operate as termination rights.
In the context of US public company acquisitions,
Asian companies must consider the board’s
Mills said that the key is that the non-US acquirer
should be familiar with the system in the US. This balances
deal certainty against the legal requirement that a
publicly-listed target here cannot have agreed to a deal and
then turn a blind eye to any competing or better offer.
"The board cannot be in a position where it cannot
pursue what might be a better transaction for shareholders," he
This has been an issue in many US-listed ChinaCo
take-privates – in particular, Delaware-incorporated AsiaInfo-Linkage’s
take-private last July. Shareholder litigation firms have
closely scrutinised these transactions and accused boards of
not receiving fair value in founder-led buyouts, which has
necessitated additional steps such as fairness opinions from
A board’s duty to get the best deal
for its shareholders is also an issue when setting of deal
"A key inquiry into deal protection mechanisms is
whether they render the outcome a done deal – even
notwithstanding a shareholder vote," said Halper. "The trick is
how close you can go to that line without going over it, and
what price the seller can extract from that."
Certain pre-deal activities might allow for more
stringent provisions. For example, Halper added, if a
seller’s board has done a meaningful and thorough
market check prior to entering a merger agreement, the odds are
the board is going to have more latitude to agree to tighter
deal protection mechanisms.
Deal term trends
Provisions related to merger control have become
more important as regimes bolster their merger review
"In recent years, we have seen more challenges by
the US antitrust authorities and the European merger control
authorities are becoming much more active – in some
cases more so than the US," Mills said.
But if there are antitrust concerns, or if
it’s thought that there could be antitrust
concerns, he said there are deal protection mechanisms such as
specific antitrust-related covenants and reverse break-up fees
to negotiate around those issues.
For example, Chinese pork producer
Shuanghui’s acquisition of US pork producer
Smithfield included a reverse break fee to account for
foreign regulatory risk.
What is getting relatively more attention these
days are provisions such as matching rights where the buyer
typically has three to five days to match a similar acquisition
proposal, Halper said. 'Force the vote’ covenants
can require a shareholder vote in the face of a better proposal
or a board’s change of recommendation.
But the potential for a lawsuit related to merger
agreements means that buyers are cautious when considering deal
"We’ve seen a preference for standard
provisions over non-standard ones because they’ll
have an easier time if they are challenged," he added.
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structured for foreign investment approval