In Real Estate Listings Deal With Zillow, Trulia Bears Most of the Risk - NYTimes.com
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`8/11/14, 4:27 PM
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`In Real Estate Listings Deal With Zillow, Trulia
`Bears Most of the Risk
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`By STEVEN DAVIDOFF SOLOMON
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`July 31, 2014 12:02 pm
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`The success of Zillow’s $3.5 billion acquisition of Trulia may depend not on
`an “and” but an “or” that the parties put in their acquisition agreement to deal
`with antitrust issues. Not only that, but the deal leaves Trulia the loser if the
`merger fails on antitrust grounds.
`
`Zillow, an Internet real estate site, is seeking to acquire one of its biggest
`competitors, Trulia, in a combination aimed at consolidating the online market
`for real estate listings and saving the combined company tens of millions of
`dollars in costs.
`
`Antitrust was probably the subject of discussion among the parties. Indeed,
`Trulia states in its annual report that Zillow is a “principal competitor” along
`with Homes.com and Realtor.com. Because of this, Zillow and Trulia needed to
`decide what they would do if their deal was challenged by the federal government
`on antitrust grounds.
`
`The bargain the two competitors struck is completely in Zillow’s favor. It
`permits the company to walk away from the transaction if regulators take any
`step to limit the combined company on antitrust grounds. Not only that, the
`parties agreed to severely limit what Trulia can do in the operation of its business
`until the deal closes or is terminated.
`
`It’s an unusual deal for Zillow, and this is where that “or” comes in.
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`http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillow-comes-out-on-top/?_php=true&_type=blogs&_r=0
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`TRULIA - EXHIBIT 1019
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`In Real Estate Listings Deal With Zillow, Trulia Bears Most of the Risk - NYTimes.com
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`8/11/14, 4:27 PM
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`The acquisition agreement puts relatively normal requirements on Zillow to
`obtain antitrust approvals, requiring the company to take “reasonable best
`efforts” to obtain clearance.
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`So far so good, but here is where things get a bit technical because the
`lawyers crafted a big exception from this requirement for Zillow.
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`The acquisition agreement, like any other for a public company, has
`conditions for completion of the deal. These conditions must be satisfied or
`Zillow is not obligated to acquire Trulia. Conditions like these usually involve
`shareholder approvals and any other consents required for the deal to go
`through, including antitrust clearances.
`
`The antitrust provision in the Zillow-Trulia agreement states that Zillow is
`not required to complete the deal if the government seeks to require it to sell
`assets, limits its ability to “conduct” the business or requires Zillow to hold the
`shares of Trulia separately and not control the company.
`
`This provision is intended to deal with government attempts to limit Zillow’s
`ownership of Trulia. That would happen if, for example, the government decided
`that Zillow should license technology or change its fee structures to preserve
`competition after the acquisition. But this is quite broad – and would cover
`basically any restriction the government might seek on Zillow’s rights as an
`owner of Trulia.
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`A second part to the provision states that if there is an action by the
`government that would have a “material adverse effect” on Trulia or Zillow,
`Zillow is not required to complete the deal. This language is common and
`basically means that if the government attempts to do anything that is
`significantly damaging to Trulia and Zillow, then Zillow can walk away.
`
`The term “material adverse effect” is a term of art that means something of
`long-term effect that is significantly adverse to Trulia or Zillow. This is a high
`standard under Delaware law, the law governing the acquisition agreement. And
`no Delaware court has ever found a material adverse effect to exist.
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`http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillow-comes-out-on-top/?_php=true&_type=blogs&_r=0
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`In Real Estate Listings Deal With Zillow, Trulia Bears Most of the Risk - NYTimes.com
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`8/11/14, 4:27 PM
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`Here is where that “or” comes in. Normally, the condition about government
`restrictions would be satisfied if the government placed restrictions on Zillow
`“and” the restrictions also had a material adverse effect.
`
`Since the material adverse effect condition is a high one, it would mean that
`the government would have to take significant steps that were harmful to Zillow
`to give it grounds to walk away. But that is not what the agreement says. Rather,
`it says that if the government places restrictions of any kind on Zillow “or” a
`material adverse effect occurs, Zillow does not have to acquire Trulia.
`
`What is the effect of this? Zillow and Trulia stated in their news release
`about the deal that “the majority of advertising dollars in the real estate sector
`have yet to migrate online or to mobile.” Moreover, they said, the companies are
`in the broader market of “media,” not just the home valuation market, and the
`two brands “have limited consumer overlap.”
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`The net effect, then, is to build Zillow’s argument that there are no antitrust
`issues here. And the broad exception allows Zillow to reinforce this point with
`regulators.
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`This may all be true, but Trulia has taken most of the risk here. If the
`authorities disagree and impose any type of restriction on the deal, however
`minor, Zillow can walk away and pay a $150 million termination fee. Whether
`the fee would compensate Tulia for the time and expense of being left to wait for
`up to 18 months is uncertain.
`
`And there is perhaps a bigger problem. If this condition is not satisfied
`because of actions by government regulators, Zillow has to wait until the
`termination date for the acquisition agreement, Jan. 28, 2016, to walk away from
`the deal.
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`That is 18 months, an eternity in the technology sector. During that time, the
`acquisition agreement would stay in effect and Trulia would be limited in what it
`could do without Zillow’s approval. Trulia could not make acquisitions, capital
`expenditures or borrow money. Trulia could not enter into an employment
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`http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillow-comes-out-on-top/?_php=true&_type=blogs&_r=0
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`In Real Estate Listings Deal With Zillow, Trulia Bears Most of the Risk - NYTimes.com
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`8/11/14, 4:27 PM
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`agreement involving compensation higher than $275,000, except to fill a void –
`and the successor’s compensation would be limited to no more than 10 percent
`above what the departing person made. Trulia also could not begin any
`intellectual property actions.
`
`Zillow has none of these restrictions, putting Trulia at a significant
`competitive disadvantage while it wait to see whether the deal will clear
`regulatory scrutiny.
`
`This is all speculation about the future, of course, and Zillow seems keen on
`a deal, meaning that it might not walk away even if the antitrust authorities do
`act. But then again, that is what acquisition agreements are for – to deal with
`events that may have low probability and high impact.
`
`In this case, that “or” puts all the risk on Trulia’s plate.
`
`Correction: July 31, 2014
`An earlier version of this article misstated the terms of Zillow's
`agreement with Trulia on a termination fee. Zillow would have to
`pay a $150 million fee. It would not avoid a termination fee.
`
`Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, is the
`author of “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity
`Implosion.” E-mail: dealprof@nytimes.com | Twitter: @StevenDavidoff
`
`© 2014 The New York Times Company
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`http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillow-comes-out-on-top/?_php=true&_type=blogs&_r=0
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