Designing Hell or High Water Clauses for Foreign Investment Clearances
Hell or high water clauses for foreign investment clearances must bound divestiture obligations with strict asset schedules and reverse termination fees.
Fiduciary out Exception
Meaning
A contractual provision within a merger agreement permits a board of directors to withdraw a recommendation of an acquisition or terminate the agreement entirely to accept a superior competing offer. This fiduciary out exception acts as a safeguard for directors when they encounter an offer that provides greater value to the shareholders than the current deal. The legal mechanism functions by allowing the selling company to bypass exclusivity obligations if specific conditions regarding the quality and certainty of the new proposal are met.
Boards often include this stipulation to avoid potential litigation for failing to act in the best interest of the corporation. When the target company receives a bona fide unsolicited proposal that a board deems superior to the existing arrangement, the clause grants the necessary freedom to engage with the third party. Application of this principle ceases if the board fails to determine that the alternative offer is both financially advantageous and reasonably capable of completion.
Negotiation Protocol
The drafting process for a fiduciary out exception requires precision regarding the definition of a superior proposal to prevent opportunistic behavior by the target board. Counsel for the acquirer frequently seeks to limit the scope by requiring that the alternative offer arrive without a breach of the no shop agreement. Sellers push for broader language that allows them to respond to inquiries that might lead to a better outcome.
Both sides agree on a notice period during which the original acquirer may revise the merger terms to match or exceed the new proposal. This matching right serves to keep the original deal intact if the bidder can provide a competitive adjustment. Parties document these steps to ensure that the target board maintains the ability to satisfy its legal duties while preserving the deal certainty that the acquirer demands.
Litigation risk drops when the agreement specifies the exact procedures for evaluating new information and notifying existing partners.
Triggering Condition
Directors activate the fiduciary out exception after a formal assessment of the financial and strategic merits of an competing acquisition bid. Market conditions or sudden shifts in industry value often drive the appearance of these alternative suitors late in the process. The board must conclude that a failure to pursue the new offer would result in a breach of duty to the shareholders.
This threshold requires a documented analysis that compares the total consideration, the certainty of funding, and the regulatory hurdles inherent in the new proposal. If the board determines that the risk of a broken deal is outweighed by the gains from the new offer, they proceed to trigger the exit. The technical language usually insists that the board receive formal advice from outside financial and legal experts before making the decision to move away from the signed agreement.
This systematic approach ensures that the decision remains objective and grounded in quantifiable data rather than subjective preferences.
Contractual Consequence
Termination following the invocation of a fiduciary out exception necessitates the payment of a termination fee by the target company to the original bidder. This monetary penalty exists to compensate the abandoned party for the time and capital invested during the transaction cycle. Provisions detailing this fee appear in the same section as the exit clause to establish the economic cost of walking away from the primary agreement.
Courts enforce these payments as valid liquidated damages unless the amount is so excessive that it functions as a coercive penalty against potential bidders. The structure of the fee keeps the board focused on the pursuit of genuine value rather than minor fluctuations in market pricing. Payment terms typically trigger immediately upon the execution of a definitive agreement with a third party.
A fiduciary out exception creates a necessary balance between the enforcement of existing contracts and the fundamental requirement to optimize shareholder returns during a corporate sale.