What If the Deal Falls Apart?

January 17th, 2018

acquisition-1-17-18.pngWe all want the happy stories about how Bank A met Bank B, had a terrific courtship and announced their marriage through a merger. Over the past few years though, there have been a number of instances where it looked like a deal was going to be struck and a merger announced, only to have the parties walk away after spending a significant amount of effort, time and money. The termination of a potential transaction can have significant negative effects on both organizations, even if done before the signing and announcement of a transaction.

These are some of the things that parties should keep in mind to help mitigate the effects of a potential transaction getting called off.

Loose Lips Sink Ships
Keep the number of people who know about the deal as small as possible for as long as possible. This is important for both buyers and sellers, but it is particularly important for sellers to ensure that their employees remain focused on their primary responsibilities at the company. Additionally, sellers will want to control what outside institutions know of their plans, and this is easier if the number of people with knowledge of the transaction is limited. This will allow a potential seller to more easily control the next steps following a terminated transaction, including whether and how to open discussions with other possible acquirers while maintaining some leverage and not appearing as damaged goods to others. The temptation to be inclusive at an early stage runs the risk of unfortunate consequences if the negotiations end. This is especially true regarding public companies.

Have a Plan B
Have the board of directors continue to understand its alternative strategies. You don’t want the board to start from scratch if a transaction falls apart. For a potential seller, the board should be aware of their alternatives so the company can quickly change gears and execute on a strategy. This could range from marketing the company to other potential buyers, raising capital (either through a public or private offering) or hiring additional executive officers, particularly if succession issues were a rationale for trying to sell.

Terminate the Deal
If it becomes clear that the transaction will not move forward, it is important to formally terminate the process. Depending on how far along the parties were in negotiating and documenting the transaction, in most instances the board should adopt a resolution terminating the process or transaction. It may be appropriate to confirm, in writing, with the other party that the transaction has been terminated and each party should abide by the terms of any non-disclosure agreement or letter of intent (return or destroy confidential records, not solicit employees or customers, and so on). Having a written record is important to support the reasons that the transaction was terminated and to provide protection from any shareholder lawsuits that could be launched questioning why a company didn’t pursue a particular strategic alternative. Also, a written record will support the possible lifting of stock-trading blackout periods established in connection with the transaction, as well as to allow the parties to pursue other acquirers or targets without implicating any exclusivity provisions.

Tie Up Loose Ends
Follow through on your housecleaning. There are always things that buyers and sellers learn about their organizations as they pursue a transaction. At the beginning of a transaction process, we regularly meet with our clients, both buyers and sellers, and work through a pre-transaction checklist to determine if anything needs to be cleaned up. It is common to find weaknesses in corporate documents, including articles of incorporation, bylaws, employment agreements or benefit plans. Other issues may be identified during due diligence. Some issues can be taken care of before the transaction process gets underway but if not, then the company should follow through and take care of any problems after the transaction is terminated.

Every bank deal should be approached with the realization that the process can be lengthy and that there are many reasons why the transaction may be halted at any stage. Keeping this in mind can help organizations to protect their franchise value.


Rob Fleetwood is a partner and head of the financial institutions group’s securities law practice area at Barack Ferrazzano Kirschbaum & Nagelberg LLP. Mr. Fleetwood regularly represents financial institutions on public and private securities offerings, recapitalizations, mergers and acquisitions, corporate governance matters and contract negotiations.