Bear Stearns: Some Legal Complications

JP Morgan Chase yesterday increased its bid for Bear Stearns to $10 per share from its previous bid of $2, fearing a refusal by shareholders to approve its takeover of the beleaguered broking entity. Several large shareholders of Bear Stearns had expressed disappointment at the initial offer price put out by JP Morgan Chase.

As the takeover battle progresses, some complications seems to have arisen in the deal documentation. This is primarily due to the hurried negotiations that preceded the announcement of the deal. Here’s an extract from the New York Times’ Deal Professor:

“A careful read of its guaranty agreement with Bear Stearns, part of its deal to acquire the troubled investment bank, suggests that the agreement may be much broader than JPMorgan intended. This apparent oversight likely played a role in JPMorgan’s decision over the weekend to consider raising its offer for Bear.

Under the merger agreement, if Bear’s shareholders vote down the takeover deal for a year, Bear can terminate the agreement. This we already knew. But it also appears that, in such circumstances, JPMorgan’s guarantee to backstop Bear’s liabilities stays in place — forever.

That is, even after the rejection from Bear’s shareholders, JPMorgan’s guarantee would continue to apply to any liabilities Bear accrued up to the termination of the agreement. This provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee.

The guarantee would not apply to liabilities accrued after termination of the agreement. Still, as The New York Times reported Monday, the agreement may have been much broader than JPMorgan and its law firm, Wachtell Lipton Rosen & Katz, meant it to be.

According to The Times, one participant in the negotiations described James Dimon, JPMorgan’s chief executive, as being “apoplectic” as he sought to have the sentence modified.”

All this points to the fact that the renegotiation of the price may not have occurred only to appease opposing shareholders, but also reportedly to overcome some of the “mistakes” that sprung up in the deal documentation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • The following comment comes from Anoop V:

    “I would like to bring to your notice this article in Frontline by C.P.Chandrasekhar titled “Leaning on the State”.(April 11, 2008) available at

    The author considers the very idea of the government bailing out financial institutions that are weakened by wrong financial decisions as inimical to the proper functioning of markets in the long run and develops a solid case for the same by looking into the Bear Stearns as well as Northern Rock incidents which happened recently.”

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