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Valuations are through the floor, the stock market is floundering, and no one knows where the technology industry is headed. But thanks to a summer court ruling, tech company executives looking to sell can breathe a little easier. According to the Delaware Chancery Court, the court generally recognized as the last word on corporate matters, it’s next to impossible for a buyer to renege on a deal. The ruling is just the latest in a series of measures Silicon Valley mergers and acquisitions lawyers are now drawing upon to make deals more predictable for clients. “It dovetails nicely with people’s need to have some security in their deals,” said Douglas Cogen, a Fenwick & West partner in San Francisco. “There’s a trend toward holding people to their original bargain, and targets crave certainty, because from the minute you announce your company has been sold, you have to get that deal done,” Cogen said. In IBP Inc. v. Tyson Foods Inc., 18373, a Delaware Chancery Court in June dismissed Tyson’s complaints about a pending deal with IBP as “buyer’s regret.” Accounting irregularities and a decline in IBP’s business prospects were not enough to cancel the deal and let Tyson off the hook, Vice Chancellor Leo Strine Jr. ruled. “It confirmed the trend of [setting] very high bars to get out of a deal,” Cogen said. As the stock market fell and became less predictable over the past year, lawyers representing buyers have tried to give their clients a clear way out of a deal. For one thing, they began to envision disaster scenarios and writing them into contracts as so-called material adverse changes, or MACs. “If you’re representing an acquirer, you really focus your client on the fact that they’d better be very clear in defining what going wrong means,” Cogen added. “And if you’re representing the target, you know the law is favorable to you, so you try to keep those MACs vague.” But while buyers are using MACs to get out of deals, sellers are increasingly seeking provisions that force buyers to go through with a sale at the price that was promised. In a case where a buyer is using stock to make a purchase, sellers are asking Valley lawyers to write into agreements strict limits on how much a buyer’s stock price can drop before it’s no longer acceptable currency in the deal. Known as price-based walkaway rights, these weren’t widely used in Silicon Valley when stocks only rose in value. “In light of the complete reversal of fortune in 2001, price-based walkaway rights are making a comeback,” said Keith Flaum, a Cooley Godward partner in Palo Alto, Calif. Since the stock market took its first tumble 18 months ago, Flaum has spent more time discussing how to protect deal prices than in his previous 10 years in practice. “Negotiations take much longer, and the provisions you have to draft are much more complex,” Flaum said. “And the deals are more challenging.” In the wake of the Sept. 11 terrorist attacks, however, tech execs are more skittish about the economy overall, Flaum said. Rather than rely on standard contracts and argue that terrorist attacks or an escalation of war is an adverse change to a deal, documents state outright that they’re deal killers. “You don’t have to argue whether it caused a material adverse change,” Flaum said. Still, for many Valley tech companies, price protections and other measures to smooth the path to a deal closing are considered luxuries. Steven Tonsfeldt, a Venture Law Group partner, is working mostly with small, private companies that are doing deals to survive, so they don’t have the leverage to make many demands. “[Price protections] are one of those things that people talk about a lot [but] it’s not something you’re going to get,” Tonsfeldt said. There’s also a downside to winning the battle for ensuring the deal will close, particularly if something bad turns up and executives choose to proceed with the deal. “If you had a right to walk away but didn’t, shareholders can sue,” Tonsfeldt said. For many Valley companies, executives can’t get past some of these issues and the deals die. “There’s an awful lot of busted deals, literally dozens of deals, interesting deals, that haven’t gotten done,” Cogen said, adding that he predicts that will change as companies accept the new deal environment. “At some point there will be an acceptance,” Cogen said. “And that will open the floodgates to a lot of deal activity.”

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