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When executives with cancer drug maker Coulter Pharmaceutical Inc. recently decided to consider a $900 million merger with biotech company Corixa Corp., they needed assurance they could walk away from the deal if Corixa’s fortunes soured. But given the rocky equity markets, Corixa officials balked at a standard walk-away clause tied to the share price. “Our objection was that there is this volatility in the marketplace and the opportunity for various sectors to catch fire and turn to nuclear winter at the drop of a hat,” said Corixa CEO Steven Gillis. “We didn’t want to be punished for that happening in biotechnology, particularly when we have lived through a number of nuclear winter episodes.” San Francisco-based Coulter should not be allowed to walk from the deal, Corixa argued, just because its stock was caught in a marketwide tailspin. As a result, the two companies negotiated a deal structure that has been used rarely, if ever, in recent years. CREATIVE COLLARS The resulting collar demonstrates how complex some deal terms can get in uncertain or volatile markets. “Everybody is putting on their creativity hats,” said Todd Carter, director of investment banking at New York’s Robertson Stephens Inc. “Market risk is higher than it’s ever been, and every day [companies] are exposing themselves to all the issues in the market, and it makes it harder to close a deal.” Under a two-tiered walk-away provision, Coulter could abandon the acquisition if Corixa shares fell below $30 per share and if Corixa should underperform the Nasdaq index by 25 percent or more. Such an arrangement would protect Seattle-based Corixa by preventing Coulter from backing out simply because of the sharp price swings in biotech stocks. In exchange, Corixa secured the ability to walk away should the U.S. Food and Drug Administration reject a key Coulter drug called Bexxar. The precarious stock market this year has led many bankers and M&A lawyers to structure collars more creatively, or even shelve them altogether. Collars — which restrict how much the deal price can fluctuate — make no sense, they say, if a company’s stock is likely to plunge below the price floor or rise above the ceiling because of market fluctuations. Instead, special provisions are needed to protect both the financial integrity of the transaction and the parties involved. For example, Remec Inc., a San Diego wireless infrastructure company, on Sept. 27 offered $488 million in stock to buy wireless network antenna supplier Allgon AB of Stockholm. But two weeks later, Remec had to restructure the bid after its stock fell from $31 to $20.06 per share, which would have lopped $172 million off the offer price. The company agreed to put up as much as $125 million in cash and pay an exchange ratio of 0.62 shares for each Allgon share if Remec’s share price should trade at an average of less than $24 between Nov. 23 and Dec. 6. If the company’s stock averaged more than $29 per share during that same period, Remec would pay the previously agreed-upon 0.54 per share ratio. Another example of a deal carefully crafted to ease shareholder concerns over market fluctuations is the Oct. 30 purchase of TelCom Semiconductor Inc. by chipmaker Microchip Technology Inc. The deal includes a complex collar arrangement. If the average closing price of Microchip’s stock during the 10 trading days preceding the completion of the deal falls between $28.30 and $32.61, the exchange ratio will be calculated by dividing $15 by that 10-day average. However, if the 10-day share-price average is less than the $28.30 floor, each TelCom share will be swapped for 0.53 shares of Microchip. If the average rises above the collar cap of $32.61, each share of TelCom will receive 0.46 shares of Microchip. In the case of Coulter, the so-called double-triggered walk-away provision reassured executives that they could break off the transaction if Corixa stock suddenly plunged because of problems at the biotech itself. “This is a reasonable approach to garner protection in very volatile times,” Gillis said. “We felt comfortable with the walk-away given that our stock over the past couple of years has never underperformed that index.” Such merger termination arrangements were common in bank deals two decades ago. But they gradually gave way to the use of standard collars that fix the dollar amount of the deal if share prices are within pre-set boundaries. Dealmakers say stock index-based provisions could become more popular, particularly since they have advantages over material adverse change clauses. This clause allows a party to back out of a deal if the other party is hit by some event that adversely affects its fortunes, such as a class action lawsuit. Since such events generally reduce a company’s stock below the rest of the market, the stock plunge itself would trigger the walk-away provision. Historically, however, material adverse changes have proved hard to enforce in court. “In the biotech industry, where you often have milestones that occur between signing and closing, this was one structure that was designed to address how you deal with those milestones,” said Keith Flaum, a lawyer with Coulter’s legal counsel Cooley Godward LLP of Palo Alto, Calif. Under a double-trigger clause such as the one invoked in the Coulter-Corixa merger, a company’s stock price defines how materially adverse the change in its valuation is. As such, a company cannot use an “event” to kill a deal unless it was adverse enough to cause the stock to drop significantly. “This is a way that people can have a collar that doesn’t just subject the deal to a whim,” said Stephen Graham, an attorney with Corixa’s legal counsel Orrick, Herrington & Sutcliffe LLP of San Francisco. “From that standpoint … it might be the beginning of a trend.” Without some creativity, collars could very well disappear altogether. “Collars would be pretty meaningless,” said Peter Simor, a partner with the M&A group at New York law firm Brown & Wood LLP, “because [with market volatility] the likelihood that [the stock] would bounce outside of the collar is pretty high, and then you would have triggered either a termination right or some other rather serious consequences.” Copyright (c)2000 TDD, LLC. All rights reserved.

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