Superior proposal: Overview, definition, and example
What is a superior proposal?
A superior proposal refers to an offer that is considered more favorable or advantageous than another existing offer. This term is commonly used in the context of mergers and acquisitions (M&A), where one company may receive multiple offers for the purchase of its business. A superior proposal is one that is deemed to provide better financial terms, strategic benefits, or other advantages over competing offers.
In legal terms, the concept of a superior proposal is often used to allow a party (typically a target company) to break an existing agreement or "no-shop" provision if a more attractive offer comes along. The decision to accept a superior proposal is usually subject to the approval of the company's board of directors, which evaluates the new offer against the existing one to determine which proposal best serves the shareholders' interests.
Why is a superior proposal important?
A superior proposal is important because it provides flexibility in business transactions, particularly in M&A deals. It ensures that companies are not locked into an agreement that is no longer in their best interest if a more lucrative or beneficial deal emerges. For businesses, the ability to consider a superior proposal can lead to better financial outcomes or strategic advantages.
For investors and stakeholders, the existence of a superior proposal clause protects their interests by ensuring that the company is pursuing the most beneficial offer, which can result in a higher return on investment.
Understanding superior proposal through an example
Imagine a company is in negotiations to be acquired by a competitor for $50 million. During this negotiation period, a third company presents a better offer of $60 million with more favorable terms. In this case, the $60 million offer is considered a superior proposal. The company’s board may then choose to terminate the original agreement and accept the superior proposal, as it is financially more beneficial for the shareholders.
In another example, a private equity firm offers to acquire a business for $100 million, but later another private equity firm offers $110 million with better financing terms. The original agreement allows for the board to consider a superior proposal, and the company decides to accept the new, higher offer as the superior proposal because it offers greater value for the shareholders.
An example of a superior proposal clause
Here’s how a superior proposal clause might appear in an M&A agreement:
"The Target Company’s Board of Directors may consider a Superior Proposal if, during the Exclusivity Period, a third party submits an unsolicited offer that is more favorable in terms of price, structure, and/or other conditions than the current proposal. The Board may terminate this Agreement and accept the Superior Proposal if, after careful evaluation, it determines that such a proposal provides greater value to the shareholders."
Conclusion
A superior proposal allows a company to consider more favorable offers even after they have entered into an agreement with another party. It is a key provision in M&A transactions and ensures that companies are always acting in the best interest of their shareholders by evaluating all potential offers for maximum benefit. By providing the flexibility to accept a better deal, a superior proposal clause helps protect the company and its stakeholders from potentially unfavorable agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.