Two CEOs of complementary middle-market software companies sat across a conference-room table last fall and shook hands on what their bankers had told them was a merger of equals. The diligence was clean. The strategic logic was sound. The combined entity was going to be number two in its category overnight, and the financial sponsors on both sides were aligned on the exit timeline.
The deal cratered eleven weeks later. Not on price, not on diligence, not on regulatory. It cratered on the question of which CEO was going to run the combined company, which board members from each side would survive the combination, and where the headquarters would sit. None of those questions had been resolved at the term sheet stage, and by the time the parties had locked in valuation and exchange ratios, the governance questions had become the deal’s pressure points and there was nowhere to release the pressure.
A merger of equals is a different transaction than an acquisition, and treating it like an acquisition with a slightly more polite vocabulary is how most MOE deals fail. I want to walk through what makes the MOE structure analytically distinct, where the failure modes actually live, and what the term sheet has to resolve before the parties commit to a definitive negotiation.
What an MOE actually is — and is not
The merger of equals is not a defined transaction type under the Delaware General Corporation Law or under any other state corporate code. It is a market term for a transaction in which two roughly comparable companies combine in a way that — on equity allocation, governance composition, and post-closing leadership — does not have a clearly identifiable acquirer and target. The transaction itself, mechanically, is almost always structured as a statutory merger under Subchapter IX of Title 8 of the Delaware Code or its equivalent in the parties’ jurisdictions. One company is, technically, the surviving entity. One company is, technically, the merged-out entity. From the standpoint of the merger statute, the transaction looks exactly like a stock-for-stock acquisition.
The MOE features sit on top of that statutory structure. They are contract features, embedded in the merger agreement and the post-closing governance documents. A fifty-fifty exchange ratio. A balanced post-closing board, often with an odd-numbered independent tiebreaker. A succession plan that names which CEO continues for how long and what the transition mechanic is. A name change, a new combined brand, a new headquarters, or a continuation of one of the existing identities — each chosen deliberately rather than defaulting to the surviving entity’s choice. The substance of an MOE is in those choices, and the choices are negotiated outside of the statutory merger framework.
The analytical mistake at the term sheet stage is to assume the statutory framework controls the substance. It does not. The statutory framework controls the mechanical execution of the merger — the certificate of merger, the effective time, the surviving-entity continuation of obligations. The substance of who runs the combined company and who controls it is in the negotiated documents, and those documents need to be drafted on different assumptions than a standard acquisition agreement.
Where the MOE actually breaks
An MOE between two private companies fails in predictable places. I have seen the same three patterns enough times to be able to name them in advance.
The first is the CEO succession question. In most MOE deals one of the two CEOs has more credibility with the post-closing board than the other, and the question of who serves as CEO of the combined entity gets resolved by the board after closing. The losing CEO is sometimes named president, sometimes named to the board, sometimes given a defined transition period after which the role evaporates. The term sheet rarely commits to a specific structure on this point because each side wants to preserve optionality. The result is that the question gets fought in board meetings post-closing, with the board composition skewed by whichever side managed to negotiate the better board representation in the merger agreement. The deal that looked like a merger of equals starts to look like an acquisition by whichever side won the board math, and the losing side’s CEO discovers — six months in — that he is on a glide path to the exit.
The drafting move at the term sheet stage is to name the CEO of the combined entity by name and to specify the transition mechanic. If the CEO of one of the two combining companies is going to run the combined entity, that needs to be in the term sheet. If a transition is contemplated — Company A’s CEO for two years, then Company B’s CEO — that needs to be in the term sheet. If a search for an external CEO is contemplated, the search mechanic and the timeline need to be in the term sheet. The failure mode is to leave it for later. Later is too late.
The second is the board composition question. An MOE typically calls for a board that reflects the rough parity of the combination. The question is what “parity” means. Five-five is parity in number. It is also a paralysis structure. Most MOE boards run six-six or seven-seven with one independent who serves as a tiebreaker, and the question of who selects the independent is itself a negotiation. A board structured with one side’s selected independent is not actually a parity board, even if the headline number is balanced. The independent’s voting record over the first eighteen months is what determines whether one side has effective control.
The drafting move is to name the independent, or the mechanic by which the independent is selected, in the term sheet. A “to-be-named-by-mutual-agreement” formulation is not a mechanic; it is a deferred fight. The mechanic should be specific: a list of three candidates pre-agreed at the term sheet stage, a defined selection process with a backup mechanism if the parties cannot agree, or a rotational chair structure that eliminates the tiebreaker dynamic entirely.
The third is the exchange ratio. A fifty-fifty exchange ratio looks like the cleanest possible MOE feature. It is also frequently the wrong number. Two companies of identical revenue can have materially different margins, growth profiles, capital intensities, and customer concentrations. A fifty-fifty exchange ratio in such a situation overweights one company’s contribution and underweights the other, and the resulting equity allocation generates resentment that surfaces in the first post-closing board cycle. The exchange ratio is a valuation question, and treating it as a symbolism question is a mistake.
The drafting move is to negotiate the exchange ratio on the same disciplined basis as any other M&A valuation — DCF, comparable transactions, precedent multiples, due-diligence-adjusted EBITDA — and to memorialize the assumptions in a schedule that travels with the term sheet. If the exchange ratio comes out other than fifty-fifty, that is an honest answer that the parties have to negotiate around, with cash bridge payments or differential treatment of contingent consideration. The honest answer is a better starting point than the symbolic answer.
The headquarters and identity questions are not soft
The questions about where the combined entity is headquartered, what the entity is called, which brand survives, and what happens to the existing offices and employees are sometimes treated as soft issues. They are not. They are the questions that the workforce of the merging entity asks first, and the answers to them shape retention and integration in the first eighteen months. An MOE that leaves headquarters questions open at signing tends to lose a substantial fraction of the smaller-headquartered company’s senior talent in the months between signing and closing, because that talent reads the absence of a commitment as a signal about which side has actually won the merger.
The term sheet should name the headquarters of the combined entity, name the entity, and commit to the brand strategy. The standard MOE move — preserving both brands on a transitional basis with a defined sunset date — works when it is committed to at the term sheet stage. It does not work when it is announced post-closing as a discovery of what the integration teams have decided.
The governance documents have to be drafted differently
An MOE’s stockholders’ agreement, charter, and bylaws are not standard-form documents. The protective provisions, the voting thresholds, the consent rights, the indemnification structure, the deadlock-breaking mechanics — each of those provisions runs on the assumption that no single shareholder has effective control. The corporate-governance regime in an MOE has to anticipate stalemate as a routine condition and provide for resolution mechanisms that do not depend on a controlling stockholder breaking ties.
A standard-form acquisition stockholders’ agreement, ported into an MOE setting without modification, tends to default the governance design into a structure that quietly favors one side. The most common pattern is that the merger agreement’s drafting party — typically whichever side’s outside counsel takes the lead — produces governance documents that reflect that side’s institutional habits. Those habits are usually buyer-side habits, even when no buyer exists. The resulting governance regime has buyer-friendly tilt on consent rights, board composition, and dispute resolution. The other side discovers this in implementation.
The drafting move is for both sides’ counsel to co-draft the governance documents from a blank slate, with an explicit list of decisions that the parties want to make differently because of the MOE structure. The list typically includes the supermajority threshold for major decisions, the deadlock-breaking mechanism, the founder lock-up structure, the drag-along and tag-along thresholds, and the exit triggers. Co-drafting takes longer than letting one firm produce the documents. It also produces documents that reflect what the parties actually agreed.
Recent deal patterns confirm the warning
The 2024 and 2025 vintage of announced MOE transactions in the middle market shows the same pattern of post-closing governance disputes that the deal lawyers’ bar has been writing about for years. Recent SEC filings on stock-deal mergers between roughly comparable parties — the kind of transactions that would be reported on Form S-4 if they involved public companies — continue to surface disclosures about post-closing CEO transitions, board reorganizations, and headquarters relocations that the original deal announcement did not flag. Private-company MOE transactions do not generate the same public record, but the pattern of post-closing failures is at least as common.
What makes the failures predictable is that they cluster around the same three questions: who runs the combined entity, who controls the board, and where the entity is anchored. The pre-term-sheet conversation in an MOE needs to answer those questions, in writing, before the parties commit to definitive-agreement drafting. If the answers are not on the table at the term sheet stage, the negotiation that follows is not a merger of equals; it is an acquisition with deferred resolution of the control question, and the side that is better at deferring tends to be the side that wins.
The honest summary
The merger of equals as a category exists because two roughly comparable companies sometimes have more to gain by combining than by competing. The structure is analytically distinct from an acquisition. The documents look the same. The substance does not. The merger agreement is the same statutory instrument. The negotiated terms are different in kind.
What the term sheet needs to resolve, before the parties sign it, is the CEO succession question, the board composition question — including the independent selection mechanic — the exchange-ratio basis, the headquarters and brand decisions, and the governance-design first principles that the parties want their counsel to apply. Deferring any of those questions is choosing, before you know it, to lose them in the post-closing.
If you are evaluating an MOE structure with a comparable competitor, sitting on a term sheet that has left the governance questions open, or trying to draft governance documents for a recently signed MOE transaction, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
