Negotiating an acquisition can be an intensive process for both buyers and sellers. For both parties, deal certainty is important when the right transaction is on the table. However for the target, the key is striking the appropriate balance between achieving deal certainty and ensuring that its board of directors maintains the ability properly discharge its fiduciary duties if a superior proposal is received.
A force-the-vote provision is a clause that requires the target's board of directors to submit the proposed transaction to a vote of its shareholders. The provision protects the transaction since forcing a shareholder vote prohibits the approval of a third party offer until the target's shareholders have voted on the proposed transaction. The process so triggered requires the target to prepare a proxy circular for approval of the transaction and obtain all the required regulatory approvals or consents before the vote can be held. This may take a considerable amount of time and consequently deter potential third party acquirors. This process may also make the target's shareholders more inclined to vote for the deal that is on the table rather than wait around for the mere prospect of a more favourable transaction.
Although typically more popular in the US, force-the-vote provisions have also been included in Canadian acquisition agreements.
"Hard" vs "soft" provisions
Force-the-vote provisions can be drafted any number of ways. On one end of the spectrum, a "soft" provision permits a target to terminate the acquisition agreement if an alternative, unsolicited but superior offer comes along and the board determines that it must consider that offer in order to properly discharge its fiduciary duties. In all other circumstances, a vote on the proposed transaction must be held.
On the other end of the spectrum, the "hard" provision is unqualified and requires a vote of the target's shareholders regardless of whether there is a superior offer. The target is not permitted to terminate the acquisition agreement as a result of the superior proposal, but the target's board may change or withdraw its recommendation to its shareholders. In these circumstances, the buyer is generally afforded the right to terminate the agreement in advance of the meeting.
Key considerations
In evaluating whether or not the inclusion of a force-the-vote provision in an acquisition agreement is appropriate, a target's board of directors should assess whether such a provision is in the best interests of its shareholders, taking into consideration the circumstances, merits and risks of a proposed transaction.
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