A new breed of jewel thief is stalking the M&A world. Deals like IntercontinentalExchange’s $8.2 billion acquisition of NYSE Euronext include so-called “crown jewel” lockups, which hand over valuable assets even if a transaction falls through. Courts have looked askance at such side agreements, but they’re creeping back. The potential benefits may rob shareholders of a higher bid.
Investor Ronald Perelman’s 1985 battle for Revlon prompted the Delaware Supreme Court to disallow lockups designed to thwart rather than encourage offers. Later decisions all but killed the tactic, and companies turned to breakup fees as protection against a deal’s collapse.
The financial crisis inspired a revival. In 2008, JPMorgan Chase won an option to buy the New York headquarters of Bear Stearns as the price for rescuing the collapsing investment bank. While acknowledging that the arrangement could dissuade better offers, a New York court ruled it reasonable in light of the dire circumstances.
That opened the door to a variety of lockups. Apple’s acquisition of AuthenTec last year called for an option to license technology from the fingerprint-sensor maker if the transaction tanked. Chinese genome firm BGI-Shenzhen’s bid for Complete Genomics included a bridge loan that could convert into the financially troubled target’s stock. And NYSE agreed that its European derivatives unit would use ICE exclusively to clear trades for two years, regardless of the outcome of their proposed merger.
It’s notable that each case helped the target, as law firm Kirkland & Ellis pointed out in a recent memo to clients. AuthenTec touted the benefits of associating with Apple and earning revenue from the license agreement. NYSE maintained that, thanks to ICE, it could avoid developing its own costly clearing system. In refusing to find the BGI deal unfair to other bidders, Delaware Judge Travis Laster stressed that the bridge loan would allow Complete Genomics to survive through the closing.
The benefits won’t always shield such arrangements from a legal challenge, especially if they’re designed to discourage other, potentially sweeter deals. As crown jewel lockups become more common, investors will need to remain vigilant. Someone eventually will attempt a royal fleecing.
