MITIGATING ANTITRUST RISK IN MERGER AGREEMENTS

Susan Creighton, Scott Sher and Paul Jin1

INTRODUCTION

As many industries in the high technology sector experience consolidation, antitrust scrutiny has increased, and only will continue to do so. Thus, it is all the more important for merging parties to consider antitrust at each stage of the deal process. Counsel for the merging parties should particularly note that antitrust risk management starts not with the announcement of the deal, but at the earliest phase of the merger process – during the drafting of the merger agreement.

In this article, we endeavor to detail and explain the various portions of a merger agreement that mitigate and shift antitrust risk between the merging parties, and offer examples of clauses taken from actual executed merger agreements. As part of our analysis of merger agreement best practices, we have undertaken an analysis of a substantial number of merger agreements associated with transactions from the last twenty years that have raised antitrust concern and summarize provisions from several key agreements.

This article includes an analysis of the following:

Cooperation clauses, in particular, the degree to which the parties must jointly present their antitrust arguments, and the degree of diligence the parties must exercise in quickly making antitrust filings around the world;

“Efforts” clauses, including the degree to which the parties must litigate, divest or otherwise take action to resolve antitrust concerns raised by the reviewing competition authorities;

Termination clauses, including requirements to continue the process through litigation and appeal; and

Fee provisions, including “reverse break-up fees” and requirements to shoulder the burdens of an expensive antitrust review.

1 Susan Creighton and Scott Sher are partners and Paul Jin is an associate at Wilson Sonsini Goodrich & Rosati.

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MITIGATING AND SHIFTING ANTITRUST RISK

Cooperation

For the purchaser, and especially for the target, it is important that the merger agreement specifies the extent to which the parties and their counsel will consult and cooperate with one another in the antitrust process, from preliminary antitrust risk analysis to the preparation of the Hart-Scott-Rodino filing as well as through any agency review. Cooperation clauses can ensure that both parties will be on the same page regarding antitrust strategy, and that the interests of both parties (and the future combined entity) will be considered “in all respects with each other in connection with any filing or submission ... and in connection with any investigation, approval process or other inquiry” – including, for example, in meetings with the reviewing agency, in white papers, stipulations with the agency on timing and submission of materials, and in any negotiation of a proposed consent decree or remedial measures.

Generally, more detailed obligations will offer more protection to the target company, but the desired level of specificity of cooperation clauses can depend on the antitrust risk of the deal. For high-risk transactions particularly, parties may want to denote, for example, which foreign jurisdictions will require filings and specify the rules for engaging with the agencies, including reviewing the other party’s response to all agency requests. Cooperation clauses may go so far as to prohibit the initiation of ex parte communications with the antitrust agencies; they should at least require prompt notice and disclosure of such communications. While the purchaser and counsel for the purchaser usually take the lead in the antitrust clearance process, from the target company’s perspective, key decisions during the antitrust investigation, such as the identification of key substantive issues or the timing of filings, should be subject to the review and approval of both the purchaser and seller.

Below are examples of cooperation clauses from past merger agreements. Note that some agreements demand far greater cooperation between the parties than others, and some allow for joint-decision making while others provide that the buyer has control over the process.

Prompt Notice of Communications Received, Prior Review and Consultation Regarding Submissions and Meetings, Opportunity to Participate in Meetings

Merger Agreement between Verizon Communications, Inc. and MCI, Inc., February 14, 2005

“To the extent permissible under applicable Law or any rule, regulation or restriction of a Governmental Entity, each of the Company and Parent shall, in connection with the efforts referenced above to obtain all requisite material approvals, clearances and authorizations for the transactions contemplated by this Agreement under the HSR Act or any other Regulatory Law, use its commercially reasonable efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (ii) promptly inform the other party of any communication received by such party from, or given by such party to, the Antitrust Division of the Department of Justice (the "DOJ"), the Federal Trade Commission (the "FTC") or any other Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby, (iii) permit the other party, or the other party's legal counsel, to review any communication given by it to, and consult with each other in advance of any meeting or conference with, the DOJ, the FTC or any such other Governmental Entity or, in connection with any proceeding by a private party, with any other Person and (iv) to the extent permitted by such Governmental Entity or other

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Person, give the other party the opportunity to attend and participate in such meetings and conferences.” (§ 6.4(b))

“To the extent permissible under applicable Law or any rule, regulation or restriction of a Governmental Entity, each of the Company and Parent shall, in connection with the efforts referenced above, obtain all requisite material approvals, clearances and authorizations for the transactions contemplated by this Agreement and will use its commercially reasonable efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry and (ii) promptly inform the other party of any communication received by such party from, or given by such party to, the Governmental Entities regulating competition and telecommunications businesses or the use of radio spectrum or regulating or limiting investment and State agencies or departments or local governments that have issued competitive access provider or other telecommunications franchises or any other similar authorizations.” (§ 6.4(c))

General Cooperation Clause

Merger Agreement between Clear Channel Communications, Inc., and AMFM Inc., October 2, 1999

“Subject to the terms and conditions herein provided, the Company and Parent shall (i) promptly make their respective filings and thereafter make any other required submissions under the HSR Act and the Communications Act, (ii) use reasonable efforts to cooperate with one another in (A) determining whether any filings are required to be made with, or consents, permits, authorizations or approvals are required to be obtained from, any third party, the United States government or any agencies, departments or instrumentalities thereof or other governmental or regulatory bodies or authorities of federal, state, local and foreign jurisdictions in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and thereby and (B) timely making all such filings and timely seeking all such consents, permits, authorizations or approvals, and (iii) take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated hereby, including, without limitation, taking or undertaking all such further action as may be necessary to resolve such objections, if any, as the FCC, the Federal Trade Commission, the Antitrust Division of the Department of Justice, state antitrust enforcement authorities or competition authorities of any other nation or other jurisdiction or any other Person may assert under relevant antitrust, competition or communications laws with respect to the transactions contemplated hereby, subject to Parent's right to direct such actions and things to be done set forth in Section 5.8(b) below.” § 5.8(a)

Prior Review and Consultation on Submissions, Prompt Notice Regarding Communications, Prohibition on ex parte Meetings or Communications, Prior Approval of Material Proposals

Merger Agreement between UnitedHealth Group, Inc. and Pacific Health Group, Inc., July 6, 2005

“Each of the parties hereto shall use its reasonable best efforts to (1) cooperate in all respects with each other in connection with any filing or submission with a Governmental Authority in connection with the Merger and in connection with any investigation, approval process or other inquiry by or before a Governmental Authority relating to the Merger, including any proceeding initiated by a private party, and (2) keep the other party informed in all material respects and on a reasonably timely basis of any written or material oral communication received by such party from, or given by such party to any Governmental Authority, or party to a proceeding, regarding the Merger. Subject to applicable Laws relating to the exchange of information, each of the parties hereto shall have the right to review in advance, and to the extent practicable each will consult the other on, all the information relating to the other parties and their respective Subsidiaries, as the case may be, that appears in any filing made with, or written materials submitted to, any third party and/or any Governmental Authority in connection with the Merger. The parties agree and acknowledge that the "Future Plans for Domestic Insurer" section (or equivalent section) of any Form A (or equivalent filing or application) and any amendments thereto and supplemental information filed in relation thereto to be filed with any Governmental Authority by Parent or its Subsidiaries in connection with the transactions contemplated hereby shall be reviewed and approved by the Company prior to any such filing, which approval shall not be

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unreasonably withheld or delayed.” § 6.03(b)

“Each party to this Agreement shall give the other party to this Agreement reasonable prior notice of any written or material oral communication with, and any proposed understanding, undertaking or agreement with, any Governmental Authority relating to the Merger. Neither of the parties to this Agreement shall independently participate in any meeting, or engage in any substantive conversation, with any Governmental Authority in respect of any filings or submissions with or investigation, approval process or other inquiry by any Governmental Authority without giving the other prior notice of the meeting or conversation and, unless objected to by such Governmental Authority, the opportunity to attend or participate. The Company will not make any material proposals relating to, or enter into, any material understanding, undertaking or agreement with any Governmental Authority relating to the Merger without the Parent's prior review and approval, and the Parent will not make any such material proposal or enter into any such material understanding, undertaking or agreement relating to the Merger without the Company's prior review and approval, provided, however, that if such understanding, undertaking or agreement is to take effect only upon the consummation of the Merger, Parent shall have no obligation to obtain the Company's prior approval but shall consult in advance with the Company with respect thereto.” § 6.03(c)

Prompt Notice of Communications, Consultation Prior to Meetings, Opportunity to Participate in Meetings

Merger Agreement between America Online, Inc., and Time Warner Inc., January 10, 2000

“Each of Time Warner and America Online shall, in connection with the efforts referenced in Section 6.4(a) to obtain all Required Approvals, use its reasonable best efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (ii) promptly inform the other party of any communication received by such party from, or given by such party to, the FCC, Franchising Authorities, PUCs, the Antitrust Division of the Department of Justice (the "DOJ"), the Federal Trade Commission (the "FTC") or any other Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby, and (iii) consult with each other in advance to the extent practicable of any meeting or conference with, the FCC, Franchising Authorities, PUCs, the DOJ, the FTC or any such other Governmental Entity or, in connection with any proceeding by a private party, with any other Person, and to the extent permitted by the FCC, PUCs, the DOJ, the FTC or such other applicable Governmental Entity or other Person, give the other party the opportunity to attend and participate in such meetings and conferences.” § 6.4((b)

Prompt Notice of Communications, Prior Review and Consultation Regarding Submissions and Meetings, Opportunity to Participate in Meetings

Merger Agreement between MCI Communications Corporation and WorldCom, Inc., November 9, 1997

“Each of WorldCom and MCI shall, in connection with the efforts referenced in Section 5.4(a) to obtain all requisite approvals and authorizations for the transactions contemplated by this Merger Agreement under the HSR Act or any other Regulatory Law (as defined below), use its best efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party; (ii) promptly inform the other party of any communication received by such party from, or given by such party to, the FCC, PUCs, the Antitrust Division of the Department of Justice (the "DOJ") or any other Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby, and (iii) permit the other party to review any communication given by it to, and consult with each other in advance of any meeting or conference with, the FCC, PUCs, the DOJ or any such other Governmental Entity or, in connection with any proceeding by a private party, with any other Person, and to the extent permitted by the FCC, PUCs, the DOJ or such other applicable Governmental Entity or other Person, give the other party the opportunity to attend and participate in such meetings and conferences. For purposes of this

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Agreement, "Regulatory Law" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, the Federal Communications Act, as amended, and all other federal, state and foreign, if any, statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition, whether in the communications industry or otherwise through merger or acquisition.” § 5.4(b)

General Cooperation Clause

Merger Agreement between MCI Communications Corporation and WorldCom, Inc., November 9, 1997

“Certain Filings. The Company and Acquiror shall use their best efforts to cooperate with one another in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and in seeking to timely obtain any such actions, consents, approvals or waivers, or making any such filings or furnishing information required in connection therewith.” § 4.2(h)

Best Efforts to Gain Clearance

Merger agreements will typically establish the level of commitment required from both parties to ensure successful clearance of the various shareholder and regulatory hurdles – including antitrust. These commercial promises to perform may mandate that the parties “take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or required by the [antitrust agencies],” or specify certain actions that the parties are required to take or are prohibited from taking in order to mollify objections from the antitrust agency (or even from a private party).

Because an agreement to merge entails covenants between the parties to pursue ends that are not fully under their control, these promises to perform are often modified by clauses using the terms “best efforts,” “reasonable best efforts,” “commercially reasonable efforts,” or other similar language. These clauses limit the lengths to which a party must go, for example, to resolve any objections or challenges by the antitrust agencies. Unfortunately, such language is vague,2 and the scope of obligations imposed by “best efforts” and related clauses is an unsettled area of law.

While practitioners generally consider such clauses to impose a higher level of duty than the general contractual duty of good faith (with “best efforts” clauses imposing a higher standard than “reasonable efforts”), courts have been inconsistent in their treatment of these provisions. Moreover, the issue of the meaning of “best efforts” clauses has risen mostly in the context of a licensee’s or distributor’s obligations to make sales of the licensor’s or manufacturer’s products, and has rarely surfaced in the context of a party’s obligations to ensure that a transaction clears antitrust hurdles. We were only able to find one case involving whether a party used its “best efforts” to effectuate a transaction (by gaining clearance from the FTC). In In re Gulf Oil/Cities

2 In fact, Illinois courts have held that “best efforts,” without further definition as to what performance is required, is too vague to be binding upon the parties. See, e.g., Kraft co Corp. v. Kolbus, 274 N.E.2d 153, 156 (Ill. App. Cot. 1971).

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Service Tender Offer Litigation, the court held that the “best efforts” requirement in the merger agreement was explicitly limited by another agreement between the parties (Offer to Purchase).3 This highlights the importance of parties defining for themselves the requirements under a “best efforts” clause instead of relying upon a non-existent standard legal definition (e.g., should best efforts include divestiture, and if so, of what?).

Many courts blur the distinction between “best efforts” and other standards such as “reasonable efforts” and “reasonable best efforts.” Indeed, several courts use “reasonable efforts” in its definition of “best efforts.” In Coady v. Toyota Motor Distributors, the First Circuit held that ‘“best efforts’ is implicitly qualified by a reasonableness test.”4 In Stewart v. O’Neill, the court held “best efforts” meant “all reasonable efforts.”5 Likewise, in Krobeth v. Brent, the court held that “best efforts” meant that the party had to use “all reasonable methods” to fulfill its obligations.6 Several court use “best efforts” and “reasonable efforts” interchangeably. In Timberline Development v. Kronman, the court, in deciding whether a “reasonable efforts” provision in a real estate contract was enforceable, stated that “the requirement to employ reasonable efforts” was “generally expressed” as “best efforts.”7

The term “reasonable best efforts” has also received inconsistent treatment. Some courts have ignored the term “reasonable” and interpreted “reasonable best efforts” as a “best efforts” standard, suggesting that there is no substantive difference between the two clauses.8 Other courts have suggested that there is a substantive difference. In Stamicarbon, N.V. v. Am. Cynamid Co., the court considered the meaning of a “reasonably best efforts” provision, observing that the word “reasonably” must add some meaning to “best efforts.” The court held that the word “reasonably,” at a minimum, excused the defendant from a duty to forego a constitutional right. In In re Chateaugay (LTV Aerospace and Defense v. Thomson), the court addressed the obligations under a “reasonable efforts” clause, and stated that it was “indisputably less stringent than that imposed by the ‘best efforts’ clauses contained elsewhere in the Agreement.” However, the precendential value of either of these cases is tenuous. The Stamicarbon case involved a licensing agreement, while the Chateaugay case was a bankruptcy matter. Moreover, the court in Stamicarbon was not addressing the difference between “reasonably best efforts” and “best efforts,” and did not state whether the outcome would have been different under a “best efforts” standard, while the court in Chateaugay neither stated its rationale for its conclusion nor pointed to any precedent.

Contrary to conventional wisdom, a “best efforts” clause does not require a party to do every conceivable action, including those detrimental to itself, to accomplish the goal. In Coady v. Toyota Motor Distributors, the First Circuit held that a “best efforts” clause “cannot mean 3 725 F.Supp. 712, 732 (S.D.N.Y. 1989). 4 361 F.3d 50, 59 (1st Cir. 2004).5 225 F. Supp. 2d 6, 14 (D.D.C. 2002).6 215 A.D.2d 813, 814 (N.Y. App. Div. 1995).7 263 A.D.2d 175, 178) (N.Y. App. Div. 2000). In cases involving an implied best efforts obligation, courts

have held that “best efforts” and “reasonable efforts” are interchangeable, and a matter of semantics. See Trecom Business System v. Prasad, 980 F. Supp. 770, 774 n.1 (D.N.J. 1997); see also Permannce v. Kenmetal, 908 F.2d 98, 100 n.2 (6th Cir. 1990) (deeming “best efforts” an “extravagant” phrase).

8 See In Re Valuevision International Inc. Securities Litigation, (896 F. Supp. 434 (E.D.Pa. 1995); see also Hermann Holdings Ltd. V. Lucent Technologies Inc., 302 F.3d 552 (5th Circ. 2002).

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everything possible under the sun”9 Similarly, the court in Triple-A Baseball Club Associates v. Northeastern Baseball held that “[w]e have found no cases, and none have been cited, holding that ‘best efforts’ means every conceivable effort.”10 But how much is required is unclear. Some courts only require good faith, which is implicit in every contract.11 Some courts suggest that under a “best efforts” standard, parties must pursue “all reasonable methods.”12 Some courts have held that “best efforts” entails measures even if they are unprofitable,13 while other courts have held the opposite.14 For example, in the oft-cited Bloor v. Falstaff Brewing, the defendant promised to use its “best efforts” to promote and sell products to which the plaintiff was entitled royalties. When the defendant experienced financial difficulties, it cut costs, including advertising costs and costs associated with other practices. This resulted in the defendant’s financial recovery yet adversely affected the sales of the products to which the plaintiff was owed a royalty. The plaintiff sued, alleging that the defendant had not used its “best efforts” to maintain a high sales volume. The court held that while the defendant must consider the impact of its actions to the plaintiff, the defendant was not required to ignore its own interests or bankrupt itself.15

Caselaw suggests that determining the obligations under “best efforts” clauses is a highly fact-specific inquiry. The First Circuit in Triple-A Baseball Club Associates v. Northeastern Baseball held that the standard “cannot be defined in terms of a fixed formula; it varies with the facts and the field of law involved.” Other courts have held likewise,16 and have considered extrinsic circumstances17 and standard industry practices.18 At the same time, one court has held the opposite. In In re Gulf Oil/Cities Service Tender Offer Litigation, the court held that a court can view the issue of the meaning of a “best efforts” clause as a “question of law from the four corners of the contract.”19

9 361 F.3d at 59.10 832 F.2d 214, 228 (1st Cir. 1987).11 See, e.g., Western Geophysical v. Bolt Associates, 584 F.2d 1164 (2nd Cir. 1978); Triple-A Baseball Club

Associates v. Northeastern Baseball, 832 F.2d 214. However, other courts have held that more than good faith is required. See, e.g., Satellite Broadcasting Cable, 807 F. Supp. 210 (D.P.R. 1992); and Krobeth v. Brent, 215 A.D.2d at 814 (stating that “best efforts” requires “more than ‘good faith’ precisely because it is an implied covenant in all contracts).

12 See Stewart v. O’Neill, 225 F. Supp. 2d at 14;. Krobeth.v. Brent, 215 A.D.2d at 814.13 See Showtime Newtorks v. Comsat Video Enterprises, 8/10/98 N.Y.L.J. 28 (co. 5) (Under either a “best

efforts” or a “reasonable business efforts” standard, the court held that “[d]ifficulty of performance occasioned only by financial difficulties, even to the extent of insolvency, does not excuse performance of contract.”); 407 East Garage v. Savoy Fifth Avenue, 23 N.Y.2d 275, 282 (N.Y. 1968) (“where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused.”).

14 See Martin v. Monumental Life Insurance, 240 F.3d 223, 235 (3rd Cir. 2001) (Holding that agreeing to use best efforts did not mean defendant was giving up its right to use sound business judgment); see also Van Valkenburgh v. Hayden Publishing, 30 N.Y.2d 34 (1972) (publisher who had agreed to use “best efforts” in promoting an author’s work was not restricted from doing the same with other authors in accordance to the publisher’s economic interests, even if it adversely affected the author’s sales).

15 601 F.2d 609, 614-15 (2nd Cir. 1979).16 See, e.g., Martin v. Monumental Life Insurance, 240 F.3d at 233.17 See U.S. Airways v. British Airways, 989 F. Supp. 482, 292 (S.D.N.Y. 1997).18 See Joyce Beverage of New York v. Royal Crown Cola, 555 F. Supp. 271, 277 (S.D.N.Y. 1983).19 725 F. Supp. at 730.

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Regardless of whether the court considers the issue a question of fact or a question of law, the parties to a merger agreement will be faced with uncertainty if they do not define for themselves the meaning of “best efforts,” either at the hands of a jury or due to the unsettled nature of the law dealing with “best efforts” clauses. This uncertainty has significant costs, including exposure to litigation and an inability to properly shift antitrust risk in the merger agreement or value the performance of the contract. Therefore, parties should consider specific language regarding their obligations to ensure that the transaction is consummated. For example, parties who wish to mandate or reserve the right to refuse divesting assets or licensing significant intellectual property, or wish to prohibit additional acquisitions which could complicate regulatory review, should include language in the merger agreement specifying such duties, as general wording probably does not mandate that the acquiring party divest assets in order to secure antitrust approval. When using specific language, the parties will benefit from certainty, as the “best efforts” obligations will not be lower than what the other provisions in the contract stipulate (floor), and the obligations can also be modified by carve outs (ceiling).

Below are examples of best efforts clauses from past merger agreements.

Reasonable or Commercially Reasonable Efforts

Merger Agreement between Alltel Corporation and Western Wireless Corporation, January 9, 2005

“Subject to the terms and conditions set forth in this Agreement, each of the parties hereto shall use all reasonable efforts (subject to, and in accordance with, applicable Law) to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective the Merger and the other transactions contemplated by this Agreement, including:. . . (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated by this Agreement.” § 5.9(a)

Reasonable or Commercially Reasonable Efforts

Merger Agreement between Bell Atlantic and GTE Wireless, July 27, 1998

“If any objections are asserted with respect to the transactions contemplated hereby under any applicable law or if any suit is instituted by any Governmental Entity or any private party challenging any of the transactions contemplated hereby as violative of any applicable law, each of Bell Atlantic and GTE shall use its commercially reasonable efforts to resolve any such objections or challenge as such Governmental Entity or private party may have to such transactions under such law so as to permit consummation of the transactions contemplated by this Agreement.” §7 .3(e)

Reasonable Best Efforts

Merger Agreement between AMC Entertainment and Loews Cineplex Entertainment, June 20, 2005

“Parent and the Company shall each use their reasonable best efforts to . . . (v) take any action reasonably necessary to defend vigorously, lift, mitigate or, rescind the effect of any litigation or administrative proceeding involving any Governmental Entity or Person adversely affecting this Agreement, the Transaction Documents or the transactions contemplated by this Agreement or the Transaction Documents until receipt of a final order by a court of competent jurisdiction permanently enjoining the transaction as to which all available applications for review have been taken (a “Final Order”).” § 6.4(a)

Reasonable Best Efforts

Merger Agreement between Adobe Systems Incorporated and

“Notwithstanding anything to the contrary contained in this Section 5.7 or elsewhere in this Agreement, if any administrative or judicial proceeding is instituted (or threatened to be instituted) challenging any of the Contemplated Transactions as violative of any Antitrust Law, Parent, Merger Sub and the Company shall use their reasonable best efforts to: (i) contest, resist or resolve any such proceeding; and (ii) to have vacated,

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Macromedia, Inc., April 17, 2005 lifted, reversed or overturned any injunction resulting from such proceeding” § 5.7(d)

Best Efforts

Merger Agreement between Chevron Corp. and Texaco Inc., October 15, 2000

“Without limiting Section 7.1(a), Parent and the Company shall subject to Sections 7.1(c) and 7.1(d), as applicable: (i) Each use its best efforts to avoid the entry of, or to have vacated or terminated, any decree, order, or judgment that would restrain, prevent or delay the Closing, on or before the End Date (as defined in Section 9.1(b)(i)), including without limitation defending through litigation on the merits any claim asserted in any court by any Person; and (ii) each use its best efforts to avoid or eliminate each and every impediment under any antitrust, competition or trade regulation law that may be asserted by any governmental authority with respect to the Merger so as to enable the Closing to occur as soon as reasonably possible (and in any event no later than the End Date), including, without limitation, (x) proposing, negotiating, committing to and effecting, by consent decree, hold separate order, or otherwise, the sale, divestiture or disposition of such assets or businesses of Parent or the Company (or any of their respective Subsidiaries) and (y) otherwise taking or committing to take actions that after the Closing Date would limit Parent or its Subsidiaries' freedom of action with respect to, or its ability to retain, one or more of its or its Subsidiaries' businesses, product lines or assets, in each case as may be required in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order, or other order in any suit or proceeding, which would otherwise have the effect of preventing or materially delaying the Closing.” § 7.1(b)

Best Efforts

Merger Agreement between Staples, Inc. and Office Depot, Inc., September 4, 1996

“Office Depot and Staples shall each use their best efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary and proper under applicable law to consummate and make effective the transactions contemplated hereby as promptly as practicable, (ii) obtain from any Governmental Entity or any other third party any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by Office Depot or Staples or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby including, without limitation, the Merger, and (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities laws, (B) the HSR Act and any related governmental request thereunder, (C) the Canadian Competition Act and any related governmental request thereunder, (D) the Investment Canada Act, and (E) any other applicable law. Office Depot and Staples shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non−filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. Office Depot and Staples shall use their best efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law (including all information required to be included in the Joint Proxy Statement and the Registration Statement) in connection with the transactions contemplated by this Agreement.” § 6.06(a)

“Staples and Office Depot agree, and shall cause each of their respective Subsidiaries, to cooperate and to use their respective best efforts to obtain any government clearances required for Closing (including through compliance with the HSR Act and any applicable foreign government reporting requirements), to respond to any government requests for information . . . The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other federal, state or foreign

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antitrust or fair trade law. Staples shall be entitled to direct any proceedings or negotiations with any Governmental Entity relating to any of the foregoing, provided that it shall afford Office Depot a reasonable opportunity to participate therein. Notwithstanding anything to the contrary in this Section 6.06, neither Staples nor Office Depot nor any of their respective Subsidiaries shall be required to take any action that would reasonably be expected to substantially impair the overall benefits expected, as of the date hereof, to be realized from the consummation of the Merger.” § 6.06(b)

Specified Obligations

Merger Agreement between Browning-Ferris Industries, Inc., and Allied Waste Industries, Inc., March 7, 1999

“... Parent shall offer to take (and if such offer is accepted, commit to take) all steps which it is capable of taking to avoid or eliminate impediments under any antitrust, competition, or trade regulation law that may be asserted by the FTC, the Antitrust Division, any State Attorney General or any other governmental entity with respect to the Merger so as to enable the Effective Time to occur prior to September 15, 1999 (the "Outside Date") and shall defend through litigation on the merits any claim asserted in any court by any party, including appeals. Without limiting the foregoing, Parent shall propose, negotiate, offer to commit and effect (and if such offer is accepted, commit to and effect), by consent decree, hold separate order, or otherwise, the sale, divestiture or disposition of such assets or businesses of Parent or, effective as of the Effective Time, the Surviving Corporation, or their respective subsidiaries or otherwise offer to take or offer to commit to take any action which it is capable of taking and if the offer is accepted, take or commit to take such action that limits its freedom of action with respect to, or its ability to retain, any of the businesses, services or assets of Parent, the Surviving Corporation or their respective subsidiaries, in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding, which would otherwise have the effect of preventing or delaying the Effective Time beyond the Outside Date. At the request of Parent, the Company shall agree to divest, hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of the businesses, services, or assets of the Company or any of its subsidiaries, provided that any such action may be conditioned upon the consummation of the Merger and the transactions contemplated hereby...” § 5.12(b)

Specified Obligations

Merger Agreement between Albertson’s, Inc. and Buttrey Food and Drug Stores Co., January 19, 1998

“Notwithstanding anything contained in Section 7.10 of this Agreement to the contrary, the Acquiror and the Company each agree to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or required by the United States Federal Trade Commission (the "FTC") or the United States Department of Justice (the "DOJ") in connection with the expiration or termination of the waiting period under the HSR Act as a result of the transactions contemplated by this Agreement; provided, however, that nothing set forth in this Section 7.11 shall be construed so as to preclude, prevent or otherwise limit the Acquiror or Newco from instituting or prosecuting or defending a suit or claim in good faith with respect to any suit, objection, requirement or other action by the FTC, the DOJ, any other such governmental authority or any private party with respect to the transactions contemplated hereby. The Acquiror shall pay all filing fees incurred in connection with such filings under the HSR Act. Each party hereto shall promptly inform the other of any material communication from the FTC, the DOJ or any other government or governmental authority regarding any of the transactions contemplated hereby. If either the Acquiror or the Company or any of their respective affiliates receives a request for additional information or documentary material from any such government or governmental authority with respect to the transactions contemplated by this Agreement, then such party shall endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response in compliance with such request. The Acquiror shall advise the Company, and the Company shall advise the Acquiror, promptly in respect of any understandings, undertakings or agreements (oral or written) which it proposes to make or enter into with the FTC, the DOJ or any other governmental authority in connection with the transactions contemplated hereby. Except as otherwise

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provided in this Section 7.11, the Acquiror agrees to resolve any objections as may be asserted with respect to the transactions contemplated hereby under the Antitrust Laws (as defined hereafter) by the applicable government or governmental authority (including, without limitation, the Antitrust Division of the DOJ or the FTC)....” § 7.11(a)

Divestiture Limitations

The target may wish to articulate clearly that the buyer must “make any and all divestitures that are a prerequisite to the FTC, DOJ or EC’s clearance of the transaction.” The purchaser, by contrast, may wish to specify that “reasonable best efforts” does not require it to sell, license or otherwise dispose of or hold separate “any material portion of the business or assets” involved. Materiality itself may be calibrated as relative to the company or assets being acquired, or more broadly to the entire business of the combined companies. Alternatively, rather than agreeing to divest specific assets or divisions, the acquiring party may place a ceiling on its divestiture obligation by reference to a specific sales level. Such a clause would permit the buyer to retain crown jewel assets or divisions with sales exceeding this sales threshold (without naming the crown jewels).

Specific provisions detailing the limits of the parties’ best efforts duties are necessary to ensure that expectations are in line with reality. However, more detailed and express divestiture provisions, of course, may signal to the agencies that the parties have antitrust concerns about their deal, and are willing to accept certain remedies if pushed. Careful judgment is required here.

Below are examples of divestiture limitations clauses from past merger agreements.

Risk Allocated to Buyer and Seller (both parties required to make divestitures if necessary)

Merger Agreement between Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., February 19, 2007

“In furtherance and not in limitation of the covenants of the parties contained in this Section 5.3, if (i) any objections are asserted with respect to the transactions contemplated hereby under any law, rule, regulation, order or decree, (ii) any administrative or judicial action or proceeding is instituted (or threatened to be instituted) by any Governmental Entity or private party challenging the Merger or the other transactions contemplated hereby as violative of any law, rule, regulation, order or decree or which would otherwise prevent, delay or impede the consummation, or otherwise materially reduce the contemplated benefits, of the Merger or the other transactions contemplated hereby, or (iii) any law, rule, regulation, order or decree is enacted, entered, promulgated or enforced by a Governmental Entity which would make the Merger or the other transactions contemplated hereby illegal or would otherwise prevent, delay or impede the consummation, or otherwise materially reduce the contemplated benefits, of the Merger or the other transactions contemplated hereby, then each of XM and Sirius shall use its reasonable best efforts to resolve any such objections, actions or proceedings so as to permit the consummation of the transactions contemplated by this Agreement, including, subject to Section 5.3(b), selling, holding separate or otherwise disposing of or conducting its or its Subsidiaries’ business or asset in a specified manner, or agreeing to sell, hold separate or otherwise dispose of or conduct its or its Subsidiaries’ business or assets in a specified manner, which would resolve such objections, actions or proceedings.” § 5.3(d)

Risk Allocated to Buyer and Seller (both parties

“In furtherance and not in limitation of the covenants of the parties contained in Sections 6.4(a) and 6.4(b), if any administrative or judicial action or proceeding,

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required to make divestitures if necessary)

Merger Agreement between Phillips Petroleum Co. and Conoco, Inc., November 18, 2001

including any proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Regulatory Law, or if any statute, rule, regulation, executive order, decree, injunction or administrative order is enacted, entered, promulgated or enforced by a Governmental Entity that would make the Mergers or the other transactions contemplated hereby illegal or would otherwise prohibit or materially impair or delay the consummation of the Mergers or the other transactions contemplated hereby, each of Phillips and Conoco shall cooperate in all respects with each other and use its respective reasonable best efforts, including, subject to Section 6.4(a), selling, holding separate or otherwise disposing of or conducting their business in a specified manner, or agreeing to sell, hold separate or otherwise dispose of or conduct their business in a specified manner or permitting the sale, holding separate or other disposition of, any assets of Phillips, Conoco or their respective Subsidiaries or the conducting of their business in a specified manner, to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the Mergers or the other transactions contemplated by this Agreement and to have such statute, rule, regulation, executive order, decree, injunction or administrative order repealed, rescinded or made inapplicable so as to permit consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, nothing in this Section 6.4 shall limit either Phillips's or Conoco's right to terminate this Agreement pursuant to Section 8.1(b), 8.1(c), 8.1(i) or 8.5 so long as such party hereto has up to then complied with its obligations under this Section 6.4.” § 6.4(c)

Risk Allocated to Buyer and Seller (neither party required to make divestitures if necessary)

Merger Agreement Between Exxon Corp. and Mobil Corp., December 1, 1998

“Notwithstanding anything else contained herein, the provisions of this Section 7.01 shall not be construed to require either party to undertake any efforts or to take any action if the result thereof would give Acquiror the right to decline to consummate the transactions contemplated by this Agreement pursuant to Section 8.02 by reason of giving rise to a Substantial Detriment.” § 7.01(b)

“... there shall not be instituted or pending any action or proceeding by any governmental authority (whether domestic, foreign or supranational) before any court or governmental authority or agency, domestic, foreign or supranational, (i) seeking to restrain, prohibit or otherwise interfere with the ownership or operation by Acquiror or any Subsidiary of Acquiror of all or any portion of the business of the Company or any of its Subsidiaries or of Acquiror or any of its Subsidiaries or to compel Acquiror or any Subsidiary of Acquiror to dispose of or hold separate all or any portion of the business or assets of the Company or any of its Subsidiaries or of Acquiror or any of its Subsidiaries, (ii) seeking to impose or confirm limitations on the ability of Acquiror or any Subsidiary of Acquiror effectively to exercise full rights of ownership of the Shares (or shares of stock of the Surviving Corporation) including, without limitation, the right to vote any Shares (or shares of stock of the Surviving Corporation) on any matters properly presented to stockholders or (iii) seeking to require divestiture by Acquiror or any Subsidiary of Acquiror of any Shares (or shares of stock of the Surviving Corporation) if any such matter referred to in clause (i), (ii) or (iii) hereof could reasonably be expected to result in a substantial detriment to the Acquiror and its Subsidiaries (including the Company and its Subsidiaries), taken as a whole (any such substantial detriment being referred to in this Agreement as a "Substantial Detriment");...” § 8.02(b)

Risk Allocated to Seller (buyer not required to make any divestitures if necessary)

“Notwithstanding the foregoing or any other provision of this Agreement, nothing in this Section 6.3 shall (i) limit a Party's right to terminate this Agreement pursuant to Section 8.2 (a) or (d) so long as such Party has theretofore complied in all material respects with its obligations under this Section 6.3 or (ii) require Parent to (x) enter into any "hold-separate" agreement or other agreement with respect to the disposition of any

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Merger Agreement between Synopsys, Inc. and Avant! Corp., December 3, 2001

assets or businesses of the Parent or any of its subsidiaries or the Company or any of its subsidiaries in order to obtain clearance from the FTC or the DOJ or any other antitrust or competition authorities to proceed with the consummation of the transactions contemplated hereby; or (y) consummate the transactions contemplated hereby in the event that any consent, approval, authorization or non-objection of any Governmental Entity obtained or sought to be obtained in connection with this Agreement is conditioned upon the imposition of any other significant restrictions upon, or the making of any material accommodation (financial or otherwise) in respect of the transactions contemplated hereby or the conduct of the business of the Surviving Company or the Parent (including any agreement not to compete in any geographic area or line of business or any agreement to license technology to third parties) or results, or would result in, the abrogation or diminishment of any authority or license granted by any Governmental Entity.” § 6.3(c)

Risk Allocated to Seller (buyer not required to make any divestitures if necessary)

Merger Agreement between CBS/Infinity Broadcasting Corp. and Outdoor Systems, Inc., May 27, 1999

There was no divestiture clause in this merger agreement. The DOJ challenged this merger and required the parties to make substantial divestitures. CBS ultimately agreed to the divestitures, although the merger agreement did not require them to do so.

Risk Allocated to Seller (buyer not required to make any material divestitures if necessary)

Merger Agreement between Hewlett-Packard Company and Compaq Computer Corporation, September 4, 2001

“Notwithstanding anything in this Agreement to the contrary, nothing contained in this Agreement shall be deemed to require HP or Compaq or any Subsidiary or affiliate thereof to take or agree to take any Action of Divestiture (as defined below) which would be reasonably likely to materially adversely impact the benefits expected to be derived by HP and its Subsidiaries (on a combined basis with Compaq and its Subsidiaries) as a result of the transactions contemplated hereby or would be reasonably likely to materially adversely affect HP and its Subsidiaries (on a combined basis with Compaq and its Subsidiaries) following the Merger (a "RESTRICTED DIVESTITURE"). For purposes of this Agreement, an "ACTION OF DIVESTITURE" shall mean (i) making proposals, executing or carrying out agreements or submitting to Legal Requirements providing for the license, sale or other disposition or holding separate (through the establishment of a trust or otherwise) of any assets or categories of assets that are material to HP, Compaq or any of their respective Subsidiaries or the holding separate of Compaq capital stock or imposing or seeking to impose any limitation on the ability of HP, Compaq or any of their respective Subsidiaries, to conduct their respective businesses or own such assets or to acquire, hold or exercise full rights of ownership of Compaq's business or (ii) otherwise taking any step to avoid or eliminate any impediment which may be asserted under any Legal Requirement governing competition, monopolies or restrictive trade practices.” §5.6(e)

Risk Allocated to Buyer (buyer required to make divestitures if necessary)

Merger Agreement between MGM-Mirage and Mandalay Resort Group, June 15, 2004

“Parent and the Company shall, from the date hereof until the Outside Date, use their respective reasonable best efforts to avoid the entry of, or to have vacated or terminated, any decree, order, or judgment that would restrain, prevent or delay the Closing. Notwithstanding the foregoing, Parent shall have the sole and exclusive right to determine, at its option, whether to contest through litigation on the merits, negotiation or other action any position or claim, including any demands for sale, divestiture or disposition of assets or business of Parent or, effective as of the Effective Time, the Surviving Corporation or their respective subsidiaries, asserted by the FTC, the Antitrust Division or other governmental authority in connection with antitrust matters or Gaming Laws which would operate to hinder or delay the Effective Time. Parent shall have the sole and exclusive right to direct and control any such litigation, negotiation or other action, with counsel of its own choosing, and the Company agrees

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to reasonably cooperate with Parent with respect thereto. Notwithstanding the foregoing, in the event any such litigation, negotiation or other action is not reasonably capable of being resolved by the Outside Date, Parent shall propose, negotiate, offer to commit and effect (and if such offer is accepted, commit to and effect), by consent decree, hold separate order, or otherwise, the sale, divestiture or disposition of such assets or businesses of Parent or, effective as of the Effective Time, the Surviving Corporation, or their respective subsidiaries or otherwise offer to take or offer to commit to take any action which it is capable of taking and if the offer is accepted, take or commit to take such action that limits its freedom of action with respect to, or its ability to retain, any of the businesses, services or assets of Parent, the Surviving Corporation or their respective subsidiaries, in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding, which would have the effect of preventing or delaying the Effective Time beyond the Outside Date. For the avoidance of doubt, Parent shall take any and all actions necessary in order to ensure that (x) no requirement for a waiver, consent or approval of the FTC, the Antitrust Division, any authority enforcing applicable Gaming Laws, any State Attorney General or other governmental authority, (y) no decree, judgment, injunction, temporary restraining order or any other order in any suit or proceeding, and (z) no other matter relating to any antitrust or competition law or regulation or relating to any Gaming Law, would preclude consummation of the Merger by the Outside Date.” § 5.12(c)

Risk Allocated to Buyer (buyer required to make divestitures if necessary)

Merger Agreement between Enterprise Products and GulfTerra Energy Company, December 15, 2004

“Unless otherwise agreed to by El Paso Parent and Enterprise MLP, if as a condition to obtaining an agreement from any Governmental Entity not to seek an injunction preventing or delaying the consummation of the Merger Transactions or to satisfy any condition to a consent or approval of any Governmental Entity necessary for the consummation of the Merger Transactions, such Governmental Entity shall require the divestiture (or the execution of a consent decree that contemplates such a divestiture) of any asset of (x) any of the El Paso Field Services Entities (a "Required FS Divestiture"), (y) Enterprise MLP or any of its Subsidiaries other than the El Paso Parent Consent Decree Assets (a "Required Enterprise Divestiture") or (z) GulfTerra MLP or any of its Subsidiaries (a "Required GulfTerra Divestiture" and, together with the Required Enterprise Divestitures, the "Required MLP Divestitures"), or any combination thereof, then the following provisions shall apply: (a) If requested by Enterprise GP, El Paso Parent is required pursuant to the Parent Company Agreement to cause (or to agree in the consent decree to cause) any Required FS Divestiture to be consummated; (b) Enterprise GP agrees to cause (or to agree in the consent degree to cause) an aggregate amount of Required MLP Divestitures up to $150,000,000 in value; (c) notwithstanding Section 5.17(b), if the Governmental Entity permits the consummation of either a Required FS Divestiture or a Required MLP Divestiture, then El Paso Parent is required pursuant to the Parent Company Agreement to cause the consummation of the Required FS Divestiture; and (d) if the Governmental Entity permits the consummation of either a Required GulfTerra Divestiture or a Required Enterprise Divestiture, then Enterprise GP shall have the right in its sole discretion to select the divestiture to be consummated.Notwithstanding anything to the contrary in this Agreement (i) Enterprise MLP and (with Enterprise MLP's consent) GulfTerra MLP shall have the right to divest any assets as may be required to prevent an injunction preventing or delaying the consummation of the Merger Transactions or to satisfy any condition to a consent or approval of any Governmental Entity necessary for the consummation of the Merger Transactions, (ii) subject to clause (iii) immediately below, GulfTerra MLP agrees to effect promptly any GulfTerra Required Divestitures recommended by Enterprise MLP, (iii) unless otherwise agreed by GulfTerra MLP, all Required GulfTerra Divestitures shall be conditioned on the closing of the Merger, and (iv) unless otherwise agreed by Enterprise MLP, all Required Enterprise Divestitures shall be conditioned on the closing of the Merger.” § 5.17

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Risk Allocated to Buyer (buyer required to make divestitures if necessary)

Merger Agreement between Albertson’s, Inc. and Buttrey Food and Drug Stores Co., January 19, 1998

“Except as otherwise provided in this Section 7.11, if any suit is threatened or instituted challenging any of the transactions contemplated hereby as violative of any Antitrust Law, the Acquiror shall take such action (including, without limitation, agreeing to hold separate or to divest any of the businesses, stores, products or assets of the Acquiror or any of its affiliates or of the Company or the Subsidiary) as may be required (i) by the applicable government or governmental authority (including, without limitation, the Antitrust Division of the DOJ or the FTC) in order to resolve such objections as such government or governmental authority may have to such transactions under such Antitrust Law, or (ii) by any court or similar tribunal, in any suit brought by a private party or governmental authority challenging the transactions contemplated hereby as violative of any Antitrust Law, in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order that has the effect of preventing the consummation of any of such transactions.” § 7.11(a)

Material Adverse Change (“MAC”) Clauses

The use of MAC clauses (or, material adverse effect clauses) is an additional way for parties to allocate risk during the pendency of a transaction. Similar to “best efforts” clauses, there is no bright-line legal standard for determining whether a MAC has occurred, and what is “material” is typically a question of fact. It is best to define these terms in the agreement.

Oftentimes, the target in particular bears the brunt of the risk should an announced deal fail to consummate. If a deal fails to close, the target’s market position may be severely weakened, and the target is likely to have experienced losses of personnel, suppliers, and customers. Moreover, the target has lost out on other opportunities to grow, invest, or be acquired. Thus, the target should seek to seek to limit its risk and give the buyer as few contractual “outs” as possible. One important way to accomplish this is to limit the definition of what constitutes a MAC. In addition to standard carve-outs such as changes due to natural disasters, acts of war, and changes applicable to the overall economy (global, U.S., or even regional) or industries in which the target operates, the target should seek to carve out specific changes due to the acquisition itself. For example, the definition of MAC should expressly exclude changes due to personnel changes, damaged supplier relationships, or customer losses, and disruption to the business due to the expenditure of resources required to gain regulatory approval. In transactions where the antitrust risk is high, and a second request and a long antitrust investigation are likely, these carve-outs are especially important.

Termination Clauses

Virtually every merger agreement has a clause outlining the various reasons one or both parties may terminate, such as for bankruptcy, failure to satisfy conditions to the closing, or expiration of a drop-dead date for any reason – including delays due to antitrust difficulties. Where antitrust problems are anticipated, the target (or the buyer) may also seek an event-based right to terminate – for example, when the competition agency: launches a formal investigation; announces that it will challenge the transaction; obtains an initial court order barring the deal; or

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obtains a final, nonappealable court order prohibiting the transaction (which can be years down the line).

Strategic considerations must be assessed when setting the drop-dead date, and the level of antitrust risk of the transaction is an important factor. When the transaction presents few competitive issues, the purchaser faces less risk that the target will be able to walk away from the deal before the transaction is cleared by the antitrust agencies. The target may desire the added security of being able to terminate the deal at an earlier date, thus avoiding both the potentially detrimental business consequences associated with deal uncertainty and the lost sales and opportunities that result from a longer pre-closing phase of the merger.

Where a transaction presents substantial antitrust risk, both parties must assess the costs and benefits of a protracted battle with the antitrust agencies. The timing of a right to terminate is crucial, especially from the target’s perspective: does the target want to hold the purchaser’s feet to the antitrust fire, risking its own engagement in a long and protracted legal battle that may end badly? Or is it best to have an escape hatch early in the process, perhaps without full visibility into the most likely outcome of the antitrust investigation? The purchaser, for its part, must consider whether the right to terminate due to antitrust delays should be within the sole discretion of the target, which may have the incentive to get out at the first sign of trouble and collect a substantial break-up fee. Both parties should consider whether an automatic, unilateral, or bilateral extension of the drop-dead date may be appropriate to manage the risk.

Break-up Fees

Break-up fees may be negotiated to compensate either party for failures by the other under its respective representations and warranties. The purchaser, for example, may be entitled to a break-up fee should the target’s board or shareholders later reject the merger, or accept a competing offer. Princess Cruises, for example, paid Royal Caribbean $62.5 million when its Board withdrew its recommendation to accept Royal Caribbean’s proposal, and instead opted to accept Carnival’s subsequent offer. Buyers also offer break-up fees as the price for dropping out of the deal in the event of material adverse changes. Monolithic Systems Technology, for example, settled its suit against Synopsys for payment of the $10 million break-up fee, when Synopsys cancelled the merger agreement shortly before closing. Breakup fees in mergers can vary, but most often cluster in the 2% to 3% range of total deal value.

The target company may also seek payment of a reverse break-up fee in the specific event that the transaction is blocked for antitrust reasons, or delayed by antitrust review beyond a negotiated “drop-dead” date (typically six to nine months after signing). In this situation, break-up fees are intended to compensate the target for the sales and development opportunities sacrificed during the aborted merger process, while providing more incentive for the purchaser to give its best efforts to gain merger clearance. The magnitude of a reverse break-up fee should reflect the anticipated damage if the deal falls apart or is challenged, which is of particular concern to the seller, since this outcome could potentially cripple the target and make it extremely difficult for the target to continue as a business if it lost significant customers and important employees during the pendency of the transaction. The target can negotiate an

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antitrust break-up fee by including a separate antitrust break-up fee provision or by including express language that requires the purchaser to pay the standard break-up fee if the transaction is terminated due to antitrust concerns. The purchaser, on the other hand, may wish to stipulate that the standard break-up fee does not apply in situations where the deal is blocked or abandoned due to antitrust concerns, which protects the purchaser in transactions where the antitrust risk is high or uncertain, and also provides more incentive for the target to give its best efforts to cooperate in the antitrust process.

Both purchasers and targets should be cautious in only relying upon a reverse break-up fee to allocate antitrust risk. First, it may be difficult accurately to gauge the dollar amount of sales and development opportunities sacrificed during the aborted merger process; in some situations, no agreeable dollar amount may cover the risk. Second, purchasers can sometimes obtain insurance for reverse break-up fees, which creates a moral hazard and may lessen the incentive for purchasers to give its best efforts to obtain regulatory clearance. Therefore, reverse break-up fees may increasingly become larger and larger in order to provide the desired shift in antitrust risk (which, obviously, would raise flags with the agencies). In two recently-announced deals, the parties negotiated extremely high reverse break-up fees. In Microsoft’s acquisition of aQuantive, the negotiated reverse break-up fee was $500 million, which is more than aQuantive’s 2006 revenues and represents approximately 8% of the purchase price. Likewise, Monsanto would have been required to pay Delta and Pine Land $600 million, which represented 40% of the purchase price, if the Department of Justice blocked the transaction.. This may reflect a refinement in the market’s understanding of the corresponding incentives of reverse break-up fees, although it is far too early to deem this a trend. Reverse break-up fees will remain an important means of shifting antitrust risk, but when parties are negotiating the merger agreement, reverse break up fees should be used in conjunction with best efforts clauses and divestiture limitations provisions.

Payment of Regulatory/Antitrust Fees and Expenses

Oftentimes, parties do not consider the extraordinary costs of an extended, formal antitrust investigation, which may multiply with simultaneous review by the competition agencies in the US, Europe and others of the 80-odd nations with merger control regimes today. A Second Request investigation in the US alone can cost each party several million dollars in legal fees, economic consulting fees and document production expenses. Litigating a later government challenge to the merger can double those expenses. It may therefore be prudent for smaller target companies to negotiate for the buyer to pay a portion or all costs of any formal antitrust investigation or litigation.

Again, sellers are particularly at risk if, after incurring the high costs of an antitrust investigation, the merger is not consummated. In addition to a break-up fee designed to compensate the target for lost sales and development opportunities, the target company may seek to have the purchaser pay the expenses associated with negotiating and entering into the merger agreement if the merger is not consummated due to antitrust concerns. Purchasers may seek to place a limit on the amount of expenses it will pay.

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Below are examples of expense clauses from past merger agreements.

Merger Agreement between Ply Gem Industries, Inc. and Alcoa Home Exteriors, Inc, September 22, 2006

“Notwithstanding the foregoing, nothing in this Section 6.02 shall require, or be construed to require, Purchaser or any of its Affiliates to agree to (i) sell, hold, separate, divest, discontinue or limit, before or after the Closing Date, any assets, businesses or interest in any assets or businesses of Purchaser, the Company or any of their respective Affiliates, (ii) any conditions relating to, or changes or restrictions in, the operations of any such assets or businesses which, in either case, could reasonably be expected to (x) result in a Material Adverse Effect or (y) materially and adversely impact the economic or business benefits to Purchaser and its direct and indirect stockholders of the transactions contemplated by this Agreement or (iii) any material modification or waiver of the terms and conditions of this Agreement. “ § 6.02(c)

“In the event the transactions contemplated by this Agreement are not consummated as a result of Purchaser’s or any of its Affiliates refusal to agree pursuant to Section 6.02(c), then as the exclusive right of Seller under this Agreement, Purchaser shall pay within three (3) days to Seller, Seller’s direct, out-of-pocket costs of negotiating, entering into, and complying with this Agreement, including all reasonable payments made by or due and owing by Seller for external legal counsel and professional consultant advice relating hereto; provided, that the payment obligations of Purchaser under this Section 6.02(d) shall not exceed $1,000,000.” § 6.02(d)

Merger Agreement between USA Waste Services, Inc. and TransAmerican Waste Industries, Inc., January 26, 1998

“Parent agrees to pay to the Company (i) its reasonable, actual, verified expenses (not in excess of $375,000 plus the expenses of Arthur Andersen referenced in Section 3.7) related to the transaction contemplated hereby if Parent terminates this Agreement because it is required to sell, divest, dispose of, or hold separate assets or businesses with aggregate 1997 revenues in excess of $6,250,000 ...” §7.6(c)

CONCLUSION

Perhaps the most common mistake, particularly in smaller or rushed transactions that may carry antitrust exposure, is not involving competition counsel early in the process and addressing these alternative clauses in an informed manner. Counsel can ascertain the likelihood and extent of antitrust review, and where protections should be built into merger agreements to offset the effects of potentially lengthy delays in the process. Counsel can also advise at the outset on how best to anticipate and protect against an agency challenge and formulate remedies to resolve expected competition objections. Early involvement of antitrust counsel can help manage client expectations and prevent unnecessary, and often costly, consequences in the later stages of a transaction.

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