Thursday, February 25, 2010
So it's hardly a surprise to anyone paying attention that GM's deal to seller its Hummer unit to an unknown privately owned company from the interior of China died yesterday. (GM announcement here) GM announced that it would begin to immediately shut down Hummer and its operations.
Though the terms of the proposed deal haven't been made public, I'm assuming the sale agreement included a customary regulatory condition to closing. Such a condition would permit either party to refuse to close and then terminate the transaction in the event the required regulatory approvals were not obtained by the deal's drop dead date. The way these conditions are often written, the parties can then walk away without either party paying a fee.
However, given the importance of Chinese regulatory approval to making this deal happen and the high degree of risk that was so evident early on, the parties (or GM) would have been smarter to include a reverse termination fee tied to the Chinese buyer's failure to secure approval for the deal. Or, at the very least, they should have considered including a "ticking fee" after the deal's first deadline passed without an approval. Hummer was always a money losing transaction venture for GM. The longer it kept it going in hopes of this deal closing, the more money GM lost. We'd have all been better off if the buyer had to pay for the delay. Of the two, the buyer was in the better position to bear the risk of China not approving the proposed deal. Were there a fee in place, the buyer would have been forced to make a decision sooner about the likelihood of this deal going forward rather than simply let it float along and cause further damage to GM.
In any event, this is an example of a transaction that may be sensitive from a regulatory perspective. In such transactions, reverse termination fees or ticking fees might play a useful role in efficiently shifting onto buyers the risks of the deal collapsing.