TRENDS IN PUBLIC REIT M&A: 2012-2017 18 a stock-for-stock transaction for the acquiring company to impose a dividend freeze on the target company while shareholders of the acquiring company continue to receive regular dividends. 5. DEAL PROTECTION PROVISIONS. REIT merger agreements typically include a suite of deal protection provisions, which are generally in line with M&A agreements in the broader market. Deal protections are provisions designed to protect the buyer’s status as the first mover and to safeguard the deal from interloping competitors. However, the duties of the target board of directors to its shareholders require that the board retain the ability to consider and accept better offers that may be made after signing. Although deal protection provisions contain many nuances, the overall framework is a familiar one: target6 is prohibited from actively soliciting competing offers once the definitive agreement is executed but can still consider unsolicited offers from third parties if the target board determines that the competing offer constitutes, or is likely to lead to, a “superior proposal,” meaning one that is more favorable to target shareholders. See “Go-Shops and Window Shops” below for variations on this customary framework. • Competing Offers. If a credible competing unsolicited offer materializes after a definitive merger agreement has been signed, a REIT merger agreement might typically address a handful of actions: Is it a “Superior Proposal”? Before a target can take any action in furtherance of the competing offer, the target board generally must first determine that the competing bid constitutes, or is likely to lead to, a superior proposal. While usually heavily negotiated, a typical REIT merger agreement might define “superior proposal” as: • an unsolicited written bona fide acquisition proposal by a third party for 50% or more of the target or its assets; • on terms that the target board determines in its good faith judgment, after consultation with outside legal counsel and financial advisors, would be more favorable to the target and its shareholders from a financial point of view, than the transaction reflected in the initial merger agreement. In making its determination, the target board must take into account all financial, legal, regulatory, timing and any other aspects of the proposed interloping transaction, including the identity of the competing bidder, the form of consideration, the bidder’s ability to finance the proposal, any break-up fees, expense reimbursement provisions, conditions to consummation and feasibility and certainty of consummation. If — and only if — the target board determines that the competing offer constitutes, or is likely to lead to a superior proposal, then the target may engage in negotiations with the interloping bidder, including sharing confidential due diligence information. At some point, these negotiations may reach a point that the (continued from previous page) case representing the accrual for 59 days of the 90-day quarter. If the historical quarterly record and payment dates for the two companies do not line up, as is often the case, then the calculation for each company’s pro-rated dividend would need to be tailored to its historical payment and accrual practices. In all cases, the record date for the pro-rated divided payment would typically be one or two business days prior to closing. For all periods following closing, the newly combined group of shareholders would begin receiving whatever the going dividend rate is determined to be for the combined entity. If a pro-rata dividend were not paid as above and shareholders of the to-be acquired company simply receive the new dividend alongside the acquiring company’s shareholders on its regular schedule, then the former are likely to be either underpaid or overpaid with respect to the partial period preceding the closing. In our example above, if Company A shareholders receive the equivalent of $0.15 dividend for their holding period prior to the merger, they will have been overpaid at the expense of Company B and its shareholders. Similarly, practitioners should consider the effect of paying a dividend in arrears if one of the companies has historically paid its dividends in advance. 6 In many stock-for-stock deals, the non-solicitation provisions apply equally to both the buyer and the target. Often both parties are subject to the same termination fee, though in a minority of transactions the buyer will pay a higher termination fee in view of its larger size. Practice Note. A somewhat seismic shift occurs in the legal and practical dynamics of a transaction when a target board formally determines that a competing offer constitutes a superior proposal. At this point, a binding deal headed towards closing can suddenly turn into a public auction. On one hand, the board’s duty to maximize shareholder value kicks in at high gear and, at the same time, the legal strings that bind target to the initial buyer begin to fray. For this reason, savvy buyers will sometimes attempt to (continued on next page)