”With the return of acquirer stock as a featured form of consideration in many recent deals, dealmakers are once again focusing on “social” issues in striking a merger agreement. As compared to most straight cash takeovers where price garners the overwhelming share of, if not exclusive, attention, an acquisition featuring stock consideration, and especially a so-called merger-of-equals, often involves significant discussion between the parties of softer issues, including governance, board composition, management, people, and corporate identity (e.g., corporate and brand names, headquarters and facility locations, and charitable and community commitments). A number of deal developments over the last few years highlight some of the risks and considerations unique to these social terms.
While negotiation of these issues may involve significant emotion, the long-held view among practitioners has been that enshrining the buyer’s commitments about these issues solely in “social covenants” in the merger agreement largely bound the acquirer post-closing from a moral/reputational, though not necessarily a legal, standpoint. This perspective was driven by the fact that the parties to the merger agreement are the buyer and the target, with the target being absorbed into the buyer family at closing. As a result, and similar to the often elaborate covenants about treatment of target employees post-closing, there is no person or entity with a contract right to hold the buyer accountable for failing to uphold these covenants after the deal closes, a fact that was often overlooked or downplayed by negotiators and the broader market. This is not to suggest that buyers cynically offered these covenants with the intent to treat post-closing compliance as optional, but buyers may have been willing to agree to more, and more robust, covenants (and sellers probably did attach, or perhaps should have attached, less value to these covenants) as a result of this simple legal truth……….”
Source: Harvard Law School Forum on Corporate Governance and Financial Regulation