Mergers and Acquisitions: Heinz and Kraft
The merger of H.J. Heinz Co. and The Kraft Foods Group as announced last week was big news as it will create the fifth largest food and beverage company in the world. It also made headlines due to the involvement of Warren Buffet’s company, Berkshire Hathaway, one of the major shareholders in Heinz and a multinational conglomerate holding company wholly owning or partly owning some of the most well-known companies in the world.
Takeaways from Deal Terms
For corporate lawyers, the true excitement of the Heniz-Kraft merger can be found in the deal terms and a recent article by the New York Times highlights some of these gems. Here are a few deal terms related to the Heinz-Kraft merger that I found most interesting and which highlight key issues corporate lawyers should consider when advising on the structure of a merger:
1. Consideration of Stock and Cash
Kraft shareholders will receive one share of Heinz stock for each share of Kraft stock, plus a cash dividend of $16.50 per share. The transaction consideration is important in two ways.
Cash and Stock
The consideration includes cash as well as stock to ensure that Berkshire and 3G together retain control of the new company. When stock is contemplated to be issued as consideration in a merger, the analysis of who will control the company post-transaction should be done immediately.
Get Tax Lawyers Involved ASAP
This deal highlights one of the most important tenets that I have learned as a corporate lawyer, which is get tax lawyers involved at the structuring phase as early as possible. According to the NY Times, the cash is being paid as a dividend in order to not trigger a buyback of Kraft’s debt and to ensure that the stock component of the merger consideration is tax-free.
Given the size of both companies and the fact that both are in the business of packaged foods, the merger will be subject to HSR (Hart Scott Rodino Antitrust Improvement Act of 1976). Heinz has agreed to take all necessary steps to file for HSR approval, except “as would have a material adverse effect”. The NY Times notes that material adverse effect (MAE) is not defined in the merger agreement, which in my experience is not uncommon, although depending on the terms of the deal, a defined MAE term may be useful. The NY Times also notes that this type of requirement is known as a “modified hell or high water provision”.
3. Minority Shareholder Protection
Minority stockholders will be left to rely on the general protections for stockholders set forth in the Delaware General Corporation Law, as there will be no protective provisions for their benefit in the organizational documents of the new company. Depending on the deal and the parties involved, protection for minority shareholders may be something to include.
4. Forum Selection
Kraft has already amended its bylaws to include a forum selection provision providing that any litigation shall be brought in Virginia. Including a forum selection clause is fairly common practice, especially when a merger is likely to attract litigation. As the NY Times points out though, a forum selection provision in anticipation of litigation may be struck down by the courts. When structuring deal terms, corporate lawyers should certainly consider the risk of litigation and take appropriate precautions, including, at least for the time being, adopting a forum selection provision.