Mergers of equals should, in theory, be the friendliest of friendly merger transactions. In a true merger of equals (as opposed to a combination of two unequally-sized businesses styled as a merger of equals, but where board seats are allocated based on relative size), issues relating to the governance and operations of the combined company, such as corporate name, headquarters location and board of directors makeup, are usually settled through a process of balanced give and take because neither party has ultimate negotiating leverage.

This somewhat genteel view of mergers of equals was, however, upended in the third quarter of 2012 immediately following the closing of the combination of Duke Energy Corporation and Progress Energy, Inc. The merger agreement for that transaction provided that William Johnson, the chairman, president and chief executive officer of Progress, would become the chief executive officer of the combined company. However, within 30 minutes of closing, the newly constituted board, which included a majority of former Duke directors, installed James Rogers, the chief executive officer of Duke, as the chief executive of the combined company.

In a letter to the editors of The Wall Street Journal shortly thereafter, the former lead director of Progress referred to these events as “the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street and as a director of 10 publicly traded companies” and “one of the greatest corporate hijackings in US business history.”

Heated rhetoric aside, the events that transpired following the Duke/Progress transaction illustrate the importance of properly structuring post-closing covenants in merger-of-equals transactions.

In the Duke/Progress transaction, the obligation to cause the Progress chief executive officer to become chief executive officer of the combined company was set forth in the merger agreement but the agreement did not specify that he would continue in such position for any specified period of time. The merger agreement also expressly provided that, other than with respect to certain limited exceptions, there were no third-party beneficiaries to the agreement. Therefore, once the transaction closed, there were no parties with standing to enforce any obligation the combined company may have had to continue to employ Mr. Johnson as chief executive officer and, upon termination, Mr. Johnson was arguably entitled only to the severance specified in his employment agreement. However, some shareholders have brought claims alleging material misstatements and omissions in the registration statement relating to the stock-for-stock transaction, as well as bad faith by the board of directors.

In order to avoid a situation like this, other merger-of-equals transactions have sought to protect the sanctity of these sorts of covenants by including them in either the charter or bylaws of the combined company. A charter provision is clearly most protective and would typically provide that a supermajority board vote would be required in order to alter agreed-upon governance matters such as board size, composition, or the identity of the chief executive officer or chairman. The number of votes necessary to constitute a supermajority would, at minimum, require that at least some directors from the boards of each of the constituent companies approve of any such change. This type of protection was built into many of the largest merger-of-equals transactions, including the 2002 combination of Conoco and Phillips Petroleum and the 2006 Alcatel/Lucent transaction.