Locking Up a Deal While a Rival Bidder Circled

The situation

Prakash had done this kind of deal before, or thought he had. As the deal lead for a mid-sized strategic acquirer looking to add a Port Hope manufacturing business to its group, his plan was ordinary by the standards of a straightforward acquisition: agree on price with the majority shareholder, get that shareholder to sign a voting support agreement locking up their shares in favour of the transaction, and move to a shareholder vote with confidence the deal would pass. Nothing about the target company suggested this would be complicated.

The target had been built by Dov, a former welder who had started fabricating custom metal components out of a small shop before growing it into a business supplying parts to manufacturers across the region, with Shira, an early investor and board member, holding a meaningful minority stake alongside him. Dov controlled just over half the shares, enough that a voting support agreement from him alone would carry the vote. The transaction value sat in the fifteen to thirty million dollar range, sized appropriately for Prakash's company, whose own municipal-adjacent planning and engineering work had made this exact kind of vertically useful manufacturing target attractive for some time.

Prakash's plan had a real constraint behind it that made speed matter more than usual. His company was in the middle of its own busy season, with existing plants running at capacity and a deal team that consisted of people who also had day jobs running those plants. He had told his board he could get this transaction closed in a normal window without pulling key operational people away from the business for months on end, and he intended to keep that promise.

The plan held for about three weeks. Then Shira, the minority shareholder, mentioned almost in passing during a routine call that she had been approached separately by another company in the same industry that seemed to have real interest in acquiring the target outright, at a price nobody had yet put in writing. It was not clear whether this was serious interest or an early exploratory conversation, but it was enough to change how the lock-up needed to be structured, and Dov's voting support agreement, still in draft, suddenly needed a harder look before anyone signed anything. Prakash's instinct was to push forward as originally planned, get Dov's signature locked in as fast as possible, and treat Shira's comment as noise. Our advice was that ignoring it would be the more expensive mistake.

What the review found

A voting support agreement is a commitment from a shareholder to vote their shares in favour of an announced transaction, and to vote against any competing proposal, for as long as the agreement stays in force. The two versions Prakash's team had been considering, sometimes called hard and soft lock-ups, differ in one important respect: a hard lock-up binds the shareholder to vote for the deal no matter what, even if a better offer shows up later, while a soft lock-up releases the shareholder if a superior proposal emerges and the target's board determines the original deal no longer serves shareholders best. Prakash's initial draft favoured a hard lock-up, on the reasoning that certainty was worth more than flexibility given his team's limited bandwidth.

Once Shira's comment surfaced, our review turned to what a hard lock-up would actually mean if her exploratory conversation became a real competing bid. A hard commitment from Dov alone, controlling just over half the shares, would likely still be enough to pass the deal at a shareholder vote regardless of what a rival offered, which sounds like a clean advantage for Prakash's company, and legally, mostly is: in Canada, a hard lock-up from a shareholder in Dov's position is common and generally enforceable, because a shareholder is entitled to vote its own shares in its own interest and is not bound by the duties that constrain a board. The sharper question was what Prakash's company and the target board were agreeing to alongside it. The fiduciary constraint runs to the board, not to Dov's own voting commitment, so it is deal protections like a no-shop covenant, a break fee, or a lock-up with no fiduciary out at all for the board that put the board at risk if a genuinely superior proposal later shows up and the board has left itself no real room to consider it.

The review also found a practical problem worth taking seriously once the shareholder-vote question was put in its proper place. A hard lock-up decisive enough that Dov's vote alone guarantees the result would make it very difficult for any rival to ever succeed, no matter how the board's own protections were drafted, and that is not a defect in Dov's right to commit his own votes. But it does concentrate risk in the wrong place: if the board had also agreed to tight deal protections without a fiduciary out of its own, and a materially better offer then surfaced, it would be the board, not Dov, exposed to a claim from Shira or other minority holders that it had left itself no way to fairly consider it, precisely the kind of extended, resource-draining litigation Prakash's company could not absorb while its operations team was already stretched thin running the business.

Weighed against that risk was the very real cost of softening the lock-up: a soft structure gives a rival a genuine opening to top the deal, and Prakash's board had made clear they wanted this acquisition and did not want to lose it to a late competitor after months of work.

What we did

1. Assessed how real the rival interest actually was. Before recommending any change to the deal structure, we pressed for detail on the competing approach Shira had mentioned, working with Prakash's team to understand whether it was a serious threat or an early conversation unlikely to materialize into an actual offer within the deal's timeline, and asking Shira directly, without pressuring her, how firm the approach had actually sounded.
2. Explained the hard versus soft lock-up tradeoff in concrete terms. Rather than a general legal briefing, we walked Prakash and his board through what each structure would mean specifically for their transaction, including the realistic risk of a dispute with minority holders if a hard lock-up shut out a genuine competing offer, and being direct with the board about the tradeoff rather than presenting the softer structure as a costless improvement.
3. Negotiated a modified lock-up with a fiduciary carve-out. We worked with Dov's counsel to build a structure that kept his voting commitment firm in ordinary circumstances but released him, on defined conditions, if a superior proposal emerged and the target board determined the original deal no longer served shareholders, giving Prakash's company most of the certainty it wanted without the exposure of a true hard lock-up, and setting a specific, narrow definition of what counted as superior so the carve-out could not be stretched to cover a marginal offer.
4. Added a matching right for Prakash's company. In exchange for accepting the softer lock-up, we negotiated the right for Prakash's company to match any competing offer within a defined window before the target board could accept it, preserving a real chance to keep the deal even if a rival appeared, rather than simply learning about a better offer after the target's board had already chosen to accept it.
5. Built in a break fee tied to the matching right. To offset the risk of doing the work only to lose to a late bidder, we negotiated a fee payable to Prakash's company if the target accepted a competing offer after the matching window, compensating for the diligence and negotiation costs already sunk into the transaction and giving Prakash's board a concrete number to weigh against the risk of losing the deal outright.
6. Kept the deal team lean and the timeline realistic. Recognizing that Prakash's operational staff could not be pulled away from running the business, we structured the workstream so his team's time was needed at defined checkpoints rather than continuously, letting the acquisition proceed without stalling the company's ongoing operations during its own busiest season of the year, which was the promise Prakash had made to his board and intended to keep.
7. Monitored for the rival bid through to signing. We kept a communication channel open with the target's counsel through closing to know promptly if the exploratory interest Shira had mentioned turned into anything formal, so the team was never caught reacting after the fact, and could put the matching right to work the moment it actually mattered rather than scrambling to reconstruct the deal's context first.

The outcome

The rival interest turned out to be real. About five weeks after the fiduciary carve-out was signed, the target's board received a written indication of interest from the competing company at a price meaningfully above what Prakash's company had agreed with Dov. Under the soft lock-up, the board was entitled to engage with it, and did, which was exactly the scenario a hard lock-up would have tried to prevent and likely could not have prevented cleanly anyway.

This is where the deal cost Prakash's company real ground. To keep the transaction, they had to exercise the matching right they had negotiated, raising their offer to meet the rival bid, which pushed the final purchase price toward the upper end of the fifteen to thirty million dollar range rather than the figure originally discussed with Dov. That increase came directly out of the acquisition budget Prakash's board had approved, and he had to go back to that board and explain why the number had moved. It was not the outcome anyone had planned for, and it should not be described as one.

What the earlier structuring work did accomplish was containment. Because the matching right and break fee existed, Prakash's company had a defined, contractual path to keep the deal rather than losing it outright to the rival or ending up in a dispute with minority shareholders over deal protections that left the board no real room to fairly consider a better offer. The transaction closed roughly four months after the original letter of intent, at a higher price than planned but still within the company's authorized range, and without the extended operational disruption or litigation risk a hard lock-up fight would likely have produced. Prakash's board took the higher price as the cost of a deal structure that had, in the end, done its job: it kept the acquisition, even if it did not keep the original number.

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