The Rep’s Ability to Amend the Agreement Following Closing

The typical merger agreement gives authority to the rep to agree to amendments following closing. This makes sense because unforeseen circumstances sometimes arise that may make some term of the agreement more burdensome than it needs to be, so the buyer and the rep logically agree to change the terms. The amendment power does, however, raise the question of how broad this power should be. Can the rep agree to an amendment that constitutes a material departure from the terms of the merger agreement that was previously approved by the selling company and its stockholders? Would such a material amendment be enforceable without the prior approval of the former stockholders? If the subject matter of the amendment was not contemplated by the original agreement, such as a covenant by the former stockholders not to compete against the buyer, will it be binding against the former stockholders?

These are difficult and unclear issues. As far as we can tell, the courts have not specifically addressed the amendment powers of reps. There is, however, authority regarding amendment powers of agents in general that should apply to the rep since it is the agent of the former shareholders. There are also statutes limiting the amendment powers of corporate directors that can provide some guidance.

An agent’s authority to amend agreements on the principals’ behalf will not ordinarily be implied; it usually needs to be expressly granted to the agent. Powers of attorney, such as those usually granted to a rep, require the agent to act in accordance with the intent of the principal.

In the M&A context, the rep is usually given express authority to effect amendments in the merger agreement. Typical amendment language in agreements does not limit the scope of this amendment authority. In our view, however, that does not give the rep the power to make any change it wants.

First, while the typical agreement does not expressly curtail the amendment power, any change that constituted a material amendment to the merger agreement would most likely be found by a court to be outside the authority the stockholders intended to convey to the rep or their intent with respect to the terms of the agreement. If it is a term that was never contemplated in the agreement, such as a non-compete clause enforceable against the former stockholders, a court would likely find that this is a new and different agreement beyond the scope of simply an amendment of the previously agreed upon terms and could not be enforced against such stockholders without their consent.

These public policy principals are also reflected in Delaware’s corporate code. The boards of merging corporations may amend the merger agreement after it has been approved by the shareholders but before it has become effective. Any such amendment, however, cannot alter the compensation that the target’s shareholders are to receive or adversely affect the shareholders of either corporation. A common theme in these laws is that the agent must adhere to the principals’ intent when contracting on their behalf.

Additionally, Delaware law generally requires a merger to be approved by the selling company’s Board and stockholders. If the rep were to approve an amendment that materially changed the deal that was previously approved by the Board and stockholders, it arguably would not be effective if it essentially is no longer the transaction that received the required Board and stockholder approval under applicable corporate law.

The problem with this whole analysis is that there is a lot of gray area. While we can think of examples of amendments that pretty clearly would be authorized and others that pretty clearly would not, there are a lot of possibilities in the middle. The analysis for these would be very fact-specific without a clear determination of how a court would rule on the issue.

Our take away from all of this is:

1. The selling stockholders should be cognizant as to whether there are any specific amendments they do not want to be effected without their consent.
2. Most buyers will want the rep’s authority to amend the agreement to be broad and will not accept broad carve-outs or exceptions to this.
3. The selling stockholders likely don’t want the rep’s authority to be too narrow because it is hard to predict what the proposed amendments will be, and nobody wants the amendment process to be unnecessarily burdensome.
4. There is a lot of uncertainty about where to draw the line around what is a permitted amendment and what is not.