It looks as though private equity buyers better get used to seeing reverse breakup fees and other seller-friendly provisions in their merger agreements.
Starting with the 2005 sale of Neiman Marcus Group Inc., LBO merger agreements often included a “two-tier” breakup fee, in which a buyer would pay a lower percentage in the event it couldn’t obtain financing and a higher one if it decided to walk from the deal in the absence of a contractual right to do so, such as a so-called material adverse effect at the target.
The McDermott and Debevoise lawyers found that those provisions remain standard. “All of the going-private deals signed since last October have explicitly provided that the seller will have no right to force the closing,” Schmidt wrote. “At least one deal did allow the seller the right to seek specific performance of the financing covenant, but for most, the only remedy if a buyer refuses to chase its lenders would be a claim for damages.”
Paul Shim, an M&A partner at Cleary Gottlieb Steen & Hamilton LLP, agrees: “The merger agreements in the deals that have been done since the bubble burst have largely followed the reverse break fee, no-financing condition, no-specific-performance paradigm.”
The article also mentions these deals are now coming with a greater level of contractual clarity regarding the buyer’s right to specific performance (i.e., forcing the private equity firm to close the deal) thanks to the decision in the collapsed buyout of United Rentals Inc. Although the Delaware Chancellor ultimately found in favor of the buyer (Cerberus Capital Management, LP), private equity firms are now making sure their deal documents clearly state the target does not have a right to specific performance:
The run of collapsed deals has led some observers to predict that sellers would demand greater contractual certainty from PE shops in merger agreements, but so far that hasn’t happened. Instead, sellers have gained some of the certainty they seek from more secure debt and equity financing arrangements while PE buyers have become more vigilant in rooting out dangerous ambiguities in contracts.
Of course, reverse breakup fees and other seller-friendly provisions may fall out of favor with the LBO market once the credit situation comes around. But until then, get used to them.
Read the entire thedeal.com article here.