Bear Stearns shares have climbed down a bit from their near eight dollar highs earlier this week. (It still takes our breath away to talk about Bear Stearns at $8 highs. We remember not that long ago debating whether Bear was a bargain at $100.) But speculation continues over whether Bear Stearns shareholders could somehow reject the takeover bid from JP Morgan Chase. As we said earlier this week, the extraordinary lock-up provisions make this scenario extremely unlikely.

The kernel of hope here is that the deal requires the approval of Bear Stearns shareholders. They will have the opportunity to vote on the sale, and could vote to reject it. But it’s far from clear what would happen to Bear Stearns if the deal was rejected. The company was on the edge of bankruptcy when the Federal Reserve and JP Morgan stepped in to rescue it with the buyout bid, the guarantee and the Fed financing. The universe of competing bidders well capitalized enough to take on Bear’s risk-laden portfolio and continue to attract new clients is exceedingly small. And the Fed is unlikely to offer the terms JP Morgan got—$30 billion of non-recourse loans—to anyone else. Even worse, with the risk of collapse of Bear now so well-understood, there is good reason to believe that the company simply cannot continue to exist as an independent entity now that it has been revealed to be so vulnerable to a bank-run by customers and counter-parties.

What’s more, the Bear Stearns shareholder will not only have to reject the deal once. They’ll have to continue to reject it in multiple votes for a year. On the initial conference call Sunday night, the JP Morgan bankers made it very clear that they regard this as a negligible risk. Steven Davidoff, DealBook’s Deal Professor, describes the provision of the merger agreement that requires multiple votes on the deal as the “Bear Put.”

[I]f Bear’s shareholders vote down the agreement, the companies have the obligation under Section 6.10 of the agreement to negotiate a restructuring of the transaction but not a change in the consideration and to resubmit it to Bear’s shareholders for approval. This obligation lasts until the agreement is terminated. The way the agreement works in these circumstances Bear could not terminate the agreement until the drop-dead date of March 16, 2009.

The strength of this lock-up is prompting all sorts of skepticism. Is that kind of deal protection legal? Doesn’t agreeing to it amount to an abdication of the responsibility of the board of directors of Bear Stearns to consider better bids? Davidoff punts on those questions. “In any event, I’m not sure that, in normal times, the Delaware courts would uphold this type of arrangement — a repeat force-the-vote provision — but this is not a normal deal, he writes.

We’re not sure exactly what this means. Fortunately Gordon Smith at the Conglomerate is a lot less ambivalent. He argues the Delaware courts would enforce the lock-up provision. Although Bear’s board might have an obligation to consider a better deal, this wouldn’t take away JP Morgan’s contractual right to compel multiple votes. “The directors of Bear Stearns provided for a fiduciary out in the event of a superior proposal, but that 'out' merely allows the board to change its recommendation to Bear's shareholders. Morgan still has its rights under the provision quoted above, which means that a competing bidder is foreclosed for the next year,” he writes.

We’ll just add that the stock-swap nature of the deal makes it more difficult for competing bidders—or shareholders who favor other bidders—to prove that their bid is superior. Sure a cash deal priced well-above what shareholders will get from JP Morgan would be superior—so long as it came without any MAC out, sans financing outs, and a rock-solid guarantee for counterparties (which are arguably necessary to keep the business going). But there don’t appear to be any bidders offering that kind of deal—and it’s hard to imagine who could. Any deal that offered stock of another company or whose terms were substantially different from the JP Morgan bid would leave enough leeway for the board to continue to recommend the JP Morgan deal as “superior” to all other comers.

And then, of course, there's the fact that Bear has agreed to sell JP Morgan its headquarters even if the JP Morgan takeover is rejected in favor of another bid. In exchange Bear would get $1.1 billion, far less than it would probably need to spend to build a new headquarters. (Note, however, that it seems that if the deal is rejected not in favor of another bidder, but simply repeated 'no' votes by Bear shareholders, Bear would get to keep the building.)

Bear Stearns Agreement and Plan of Merger [LawProfessors]
JPMorgan’s $12 Billion Bailout [DealBook]
About Bear Stearns' Stock Price ... [The Conglomerate]