M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, December 10, 2007

Myers Industries: The True Option

Well -- fresh off my post yesterday about the Future of Private Equity M&A and the hope for PE deals, Myers Industries became the latest train wreck triggered by a reverse termination fee.  It appears that the reputational constraints are becoming less of a barrier to exercising these provisions as time passes and more private equity firms do so.  Myer's announcement stated

The Board of Directors of Myers Industries, Inc. (NYSE: MYE) today announced that GS Capital Partners (GSCP) has requested more time to complete the acquisition of the Company. In consideration for extending the closing date of the transaction from December 15, 2007 to April 30, 2008, GSCP has agreed to make a non-refundable payment to Myers of the previously agreed upon $35 million fee. GSCP has secured an extension of its debt financing commitments from Goldman Sachs Credit Partners and Key Bank pursuant to which GSCP has agreed to contribute another $30 million of equity to the transaction.

GSCP has acknowledged that there has been no material adverse change in Myers' business, and that GSCP's deadline extension request resulted from its desire to further evaluate conditions in certain industries in which Myers operates.

Isn't that nice of GSCP -- this is now the second deal (after Harman) that GSCP has backed out of -- they are on the list with Cerberus.  And it was not coincidental that the $35 million payment by GSCP referred to above was the same amount as the reverse termination fee in the merger agreement.  NB.  This provision was clearly drafted by Fried Frank, counsel for GSCP -- Myers had no choice here -- the $35 million was the best it could get. 

And this is where it gets really interesting.  In the Letter Agreement signed with respect to this payment, the parties amend the merger agreement to remove any other penalty GSCP is subject to if it fails to complete the acquisition.  Again, they do not terminate the agreement, but rather amend it.  The Letter Agreement states:

MergerCo hereby agrees to pay, or cause to be paid, to the Company an amount equal to $35 million (the "Fee") in immediately available funds on the second Business Day following the date of this Letter Agreement in satisfaction of any obligation MergerCo may have under Section 8.6(c) of the Merger Agreement. The Fee is nonrefundable. The Company hereby waives any right that it has against Parent, MergerCo or the Guarantors to recover any other fee or damages pursuant to, arising out of or in connection with the Merger Agreement (including any right to recover the MergerCo Termination Fee pursuant to Section 8.6(c) of the Merger Agreement) in the event that the transactions contemplated by the Merger Agreement are not consummated for any reason (including the termination or any alleged breach of the Merger Agreement). The Company hereby agrees that from and after the date of this Letter Agreement, it is not entitled to, and will not seek, specific performance or any equitable remedy against Parent, MergerCo, the Guarantors, or any of their respective Affiliates, arising out of, or in connection with, the consummation of the Merger or failure to consummate the Merger.

Yet, since the merger agreement is still in effect, GSCP now has a true option on Myer Industries for the already paid lump sum of $35 million. Per the letter agreement, the option is exercisable until the merger agreement is terminated by  Myers (which it can do fifteen days after the date that Myers delivers to GSCP Myers' unaudited quarterly financial statements for the period ended March 31, 2008) or by GSCP (which it can do after April 30, 2008). Mitigating this boon to GSCP, Myers is provided in the Letter Agreement full latitude to solicit and enter into discussions with third parties concerning competing bids -- the termination fee is also reduced to $0, although GSCP still has a six business day matching right.  In addition, the covenants limiting pre-closing actions by Myers are largely stripped.  The end result is to turn the merger agreement into a an option; GSCP now has a four month period to decide whether or not to exercise it and buy Myer.  A good deal for $35 million given the volatility in the market. 


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