M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, May 15, 2013

Weil, Gotshal 2012 survey of sponsor-backed going private transactions

Weil, Gotshal & Manges recently published its sixth survey of sponsor-backed going private transactions, which analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe, and Asia-Pacific. (We covered last years survey here.)

The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.

Here are some of the key conclusions Weil draws from the survey:

  • The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
  • Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
  • Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
  • . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
  • Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
  • Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
  • Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.


May 15, 2013 in Break Fees, Contracts, Deals, Going-Privates, Leveraged Buy-Outs, Private Equity, Research, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 9, 2013

SRZ 2012 PE Buyer/Public Target Deal Study

Schulte Roth & Zabel has released this client alert containing the highlights from its most recent study on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100-$500 million range ("middle market" deals) and greater than $500 million ("large market" deals). During the period from January 2010 to Dec. 31, 2012, SRZ identified a total of 40 middle market deals and 50 large market deals that met these parameters.  Here are SRZ's key observations from the study:

1.  Volatility in the number and terms of middle market deals makes it more difficult to identify "market practice" in that segment.

2. Overall, middle market deals took significantly longer to get signed than large market deals.

3. "Go-shop" provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.

4.  While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.

5.  While the frequency with which middle market deals use reverse termination fees ("RTFs") has converged on large market practice, the size of RTFs has not.

6.  Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.


April 9, 2013 in Break Fees, Deals, Private Equity, Transactions | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 26, 2013

Gibson Dunn's 2012 Survey on No-Shops & Fiduciary Out Provisions

In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more.  Among other things, they have compiled data relating to

  • a target’s ability to negotiate with an alternative bidder,
  • the requirements to be met before a target board can change its recommendation,
  • each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
  • the consequences of such a termination. 


February 26, 2013 in Break Fees, Contracts, Deals, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 13, 2010

Cogent - matching rights and termination fees

I just want to add a couple of things to Afra and The Deal Professor's posts on the recent In re Cogent opinion from Vice Chancellor Parsons.  In addition to providing clarity on the question of top-up options, the opinion provides more data points in at least two other areas of interest.  First, Vice Chancellor Parsons signs up to the "sucker's insurance" school with respect to matching rights in merger agreements. Here's the relevant portion of the opinion on the plaintiff's matching rights argument.   

    The first two items challenged by Plaintiffs are the no-shop provision and thematching rights provision, both of which are included in §6.8 of the Merger Agreement.The no-shop provision, according to Plaintiffs, impermissibly restricts the ability of the Board to consider any offers other than 3M’s. It also prohibits Cogent from providing nonpublic information to any prospective bidder. Similarly, Plaintiffs object to the matching rights provided for in the Merger Agreement, under which 3M has five days tomatch or exceed any offer the Board deems to be a Superior Proposal. Plaintiffs arguethat these two provisions, taken together, give potential buyers little incentive to engagewith the Cogent Board because they tilt the playing field heavily towards 3M. As a result, according to Plaintiffs, prospective bidders would not incur the costs involved withcompiling such a Superior Proposal because their chance of success would be too low.

    After reviewing the arguments and relevant case law, I conclude Plaintiffs are not likely to succeed in showing that the no-shop and matching rights provisions are unreasonable either separately or in combination.  Potential suitors often have a legitimate concern that they are being used merely to draw others into a bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is reasonable for a seller to provide a buyer some level of assurance that he will be given adequate opportunity to buy the seller, even if a higher bid later emerges.

I tend to disagree that providing a first bidder with strong matching rights along the lines of those in the Cogent merger agreement is going to be a strategy that will maximize value for shareholders (previous posts here).  Will it encourage an initial bid where there otherwise might not be one?   Probably, but that's a different story.  If a seller is looking to generate initial bids there are other ways to do so that don't deter second bidders.  Vice Chancellor Strine and now Vice Chancellor Parsons, I suppose, think the fact that matching rights are so common in merger agreements and the fact that we see the occasional jumped bid means that matching rights are not a deterrent to second bids.  I don't think that's right, but let's let that sit for another day.

The second additional point interest in the Cogent opinion is the fact that Parsons gives dealmakers some guidance on calculating termination fees.  In a few opinions, Vice Chancellor Strine has asked whether it might make sense to calculate termination fees as a percentage of enterprise value and not equity or deal value (In re Dollar ThriftyIn re Toys r Us and In re Netsmart).   Vice Chancellor Parsons makes it pretty clear where he stands on this question.  If you're going to be in his court, best to talk equity value when calculating termination fees.  Plaintiffs argued that although the termination fee was only 3% when using equity or transaction value, it was 6.6% when calculated as percentage of the enterprise value.  Parsons was happy relying on equity value in determining that the termination was not unreasonable. 



October 13, 2010 in Break Fees, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, September 30, 2010

Dollar Thrifty Vote Goes Down

This is a big week for newsworthy shareholder votes!  Dollar Thrifty shareholders voted down the Hertz offer today (from Bloomberg): 

Dollar Thrifty Automotive Group Inc.’s shareholders rejected Hertz Global Holdings Inc.’s $1.46 billion takeover offer a day after Avis Budget Group Inc. added a breakup fee to its higher bid.

The vote at the special meeting in Chicago today was about 13.8 million shares against the Hertz bid, versus 11.8 million shares in favor.

Only 41% of the outstanding shares were voted in favor of the Hertz deal.  

For weeks Avis had refused to give Dollar Thrifty a reverse termination fee with an anti-trust/regulatory trigger - until yesterday when they offered up a $20 million fee.  To be honest, the 1.3% fee that $20 million represents is nothing compared the damage that might be suffered by Dollar should Avis walk away in the event of regulatory challenges.  I know that the reverse termination fee has been a big sticking point with the Dollar board, but given the small size of the one finally offered up by Avis, I can't imagine that the reverse termination fee was really driving many votes.  If you think about a reverse termination fee as an equivalent to a liquidated damages provision paid to the seller in the event the buyer is unable to complete the deal, even the $44 million offered up by Hertz was probably much too small.


September 30, 2010 in Break Fees | Permalink | Comments (0) | TrackBack (0)

Friday, April 16, 2010

Speed-dating and the Return of Irrational Deals?

It’s been a good April for deal junkies.  There are predictions of a pickup in deal-making (although some question whether these predictions are just that).  If the last few months spate of both friendly and hostile deals are a good indication, then predictions that “The next two quarters will probably be defined as a very aggressive period of speed-dating, where companies will try out different combinations to see if they make strategic sense and are actionable,” (by Paul G. Parker, head of global mergers and acquisitions for Barclays Capital) may likely come to fruition.  Obviously there are a lot of pluses to more deals being done (especially for those of us who study deals and deal-making).  As I asked in my post earlier this week, one of the big questions will be whether deal technology like reverse termination fees (RTFs) will persist in 2010 and if so in what form.  This was hot topic at the M&A panel held this week at the Tulane University’s Corporate Law Institute. I for one hope and expect to see the continuing complexity of RTFs where buyers and sellers actually take into account deal risk, such as financing risk, rather than a return to the problematic option-style RTF structure of the private equity deals of 2004-2007.  But then again, you never know…
Chancellor Strine joked at Tulane that “We need to get past point at which boards prudently take into account risk. We need to get them to do irrational deals” since "Those are the deals that make this conference fun.”
I guess you could say that those are the deals that make my job fun as well ;-)

- AA

April 16, 2010 in Break Fees, Deals, Merger Agreements, Transactions | Permalink | Comments (1) | TrackBack (0)

Wednesday, April 14, 2010

What is going on with reverse termination fees?

We at the M&A Law Prof blog are somewhat enamored of reverse termination fees (RTFs).  I have a draft paper (Transforming the Allocation of Deal Risk Through Reverse Termination Fees) coming out this fall in the Vanderbilt Law Review and Brian has a paper (Optionality in Merger Agreements) coming out in the Delaware Journal of Corporate Law.  Brian’s paper examines whether reverse termination fees are “a symmetrical response to the seller’s judicially-mandated fiduciary put and whether such fees represent an efficient transactional term.”  Brian’s paper is terrific, so I encourage you to read it (and no, he isn’t paying me to tell you this). For those interested in learning more about the history of the use of RTFs, take a look at Elizabeth Nowicki's nifty empirical account of "reverse termination fee clauses in acquisition agreements for deals announced from 1997 through 2007, using a data set of 2,024 observations."

My paper is an account of the use of RTFs in strategic transactions.  The abstract gives a summary:

ABSTRACT: Buyers and sellers in strategic acquisition transactions are fundamentally shifting the way they allocate deal risk through their use of reverse termination fees (RTFs). Once relatively obscure in strategic transactions, RTFs have emerged as one of the most significant provisions in agreements that govern multi-million and multi-billion dollar deals. Despite their recent surge in acquisition agreements, RTFs have yet to be examined in any systematic way. This Article presents the first empirical study of RTFs in strategic transactions, demonstrating that these provisions are on the rise. More significantly, this study reveals the changing and increasingly complex nature of RTF provisions and how parties are using them to transform the allocation of deal risk. By exploring the evolution of the use of RTF provisions, this study explicates differing models for structuring deal risk and yields greater insights into how parties use complex contractual provisions not only to shift the allocation of risk, but also to engage in contractual innovation.

My study only spans deals announced before mid-2009, so I am thinking about a part 2 of this paper that looks at the use of RTF structures in deals after mid-2009.  My question is whether, and if so how and why, RTF provisions have changed now that they have become a somewhat more mature provision in acquisition agreements and in light of predictions that happy days may be here again for dealmakers.  If you have any comments on this paper, they are especially welcome before the end of April but even after that I may be able to make some minor tweaks, so please send me your thoughts.

- AA

April 14, 2010 in Break Fees, Deals, Merger Agreements, Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 17, 2010

Termination Fees in US and UK - standards vs. rules

John Coates' new paper, M&A Break Fees: US Litigation vs. UK Regulation, takes a look at the question ex ante rules vs ex post standards with respect to break fees.  One of the numerous results worth noting was that in the US Coates observed an increase in the size of break fees (presumably as parties litigated and searched for a level that courts would accept).  In the UK on the other hand, Coates reports that break fees started near the permitted cap and stayed there.

Abstract:  This paper contrasts UK and US governance of M&A break fees to see what the contrast can teach us about trade-offs between litigation and regulation as modes of governance, including how laws change under each regime over time. Data on 1,136 bids in 1989-2008 and 61 fee disputes show: (1) the UK caps fees at a low level with a simple ex ante rule based not on regulatory expertise but on an arbitrarily chosen percentage of bid value, which nonetheless has the virtues of clarity and lower litigation costs, and enhances competition conditional on an initial bid, and (2) US courts evaluate fees ex post with a complex and vague standard, allowing for greater variation and higher average fees, reducing bid competition and increasing bid completion rates, and possibly increasing M&A overall, at the cost of legal uncertainty and litigation (although less than might be expected), in part because courts resist articulating clear rules. Laws in each nation exhibit inertia; are protected by entrenched interest groups (institutional investors in the UK, lawyers in the US); and co-exist with the opposite approach (litigation in the UK, regulation in the US), even within the domain of M&A law. Subject to strong limits on external validity, the case study suggests that interest groups may be the most important factors shaping the initial choice between regulation and litigation, even for otherwise similar nations in a similar context, and that a combination of interest groups formed in response to a given choice, as well as lawmaker incentives, may preserve those choices even after the conditions giving rise to the initial choice have passed away.


February 17, 2010 in Break Fees | Permalink | Comments (0) | TrackBack (0)

Thursday, January 14, 2010

More on NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.


January 14, 2010 in Break Fees, Contracts, Corporate, Deals, Federal Securities Laws, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity, Transactions | Permalink | Comments (1) | TrackBack (0)

Thursday, June 4, 2009

Reverse termination fees

 Buy-side optionality in merger agreements is an area of a lot of interest these days.  I know Steven has spent time on this blog and over at The Deal Professor blog thinking about it, particularly in the context of financial buyers.  I’ve been giving it some thought as well. 

 When the Brocade-Foundry transaction was announced (July 2008), it was unusual because it involved a strategic buyer and a reverse termination fee and became part of a discussion of increased optionality in merger agreements.  Most of that discussion has focused on optionality that private equity buyers have been able to negotiate.  I’ve been building a dataset on of reverse termination fees for a paper I’m writing focused on optionality with respect to strategic buyers.  I’ve been surprised, first at the number of transactions in which the buyer agrees to pay a fee to a seller, and second at the relative diversity of provisions providing for a fee to be paid to the seller in the event the buyer seeks to terminate.  In blog-like fashion, here’s a quick run down.

 In my dataset of transactions with only strategic buyers from 2003 to 2008, approximately 18% of those transactions include a reverse termination fee.  Of the transactions with reverse termination fees, the vast majority (71%) simply track the termination fee in terms of size.  This probably for no other reason than it simplifies negotiation.  Of those transactions in which the fees do not track each other, the reverse termination fees are higher than the termination fees (70%).  This makes sense if you think there fiduciary duties that constrain the size of termination fees don’t work the same way on the buy-side.  There’s something to that. 

 In terms of triggers, while termination fees are pretty consistently triggered by some combination of a termination and a competing proposal, reverse termination fees are a little more diverse.  Some reverse break fees are triggered by a termination subsequent to a lack of buy-side financing (as in the private equity buyer case).  Others are triggered upon a termination subsequent to a competing proposal for the buyer.  Terminations for regulatory/anti-trust reasons also can sometimes trigger a reverse termination fee.  The extreme case, of course, is triggered when the seller terminates because the buyer refuses to close (all other conditions having been met).  This is the ‘pure’ option. 

 In any event, I hope to get a version of this paper out by August.  If you have come across varieties of reverse termination fee triggers that you think are important that I have left out of this brief taxonomy, please feel free to comment below.


Update:  Here's an early draft of my paper, Optionality in Merger Agreements.

June 4, 2009 in Break Fees, Research | Permalink | Comments (2) | TrackBack (0)

Sunday, October 28, 2007

How to Draft a Reverse Termination Fee Provision

There have now been four relatively large private equity transactions announced since the August credit/market crisis:  3Com ($2.2 billion), Radiation Therapy Services $(1.1 billion), Goodman Global ($2.65 billion), and Puget Energy ($7.4 billion).  Given this growing, yet still small, dataset, I thought it would be a good time to assess how private equity reverse termination fees are being drafted and whether there has been any shift in market practice post-August.  So, let's start with the Goodman Global merger agreement which was filed last Thursday and negotiated by attorneys at O'Melveny for Goodman Global and Simpson Thacher for the private equity buyer, Hellman & Friedman.

Section 7.1(e) permits termination:

(e) by the Company by notice to Parent, if (i) Parent shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform . . . . or (ii) the conditions to closing set forth in Section 6.1 and Section 6.3 (other than the condition set forth in Section 6.3(c)) are satisfied on the final day of the Marketing Period and Parent and Merger Sub have not received the proceeds of the Debt Financing or Equity Financing (other than as a result of failure by the Company to satisfy the condition set forth in Section 6.3(c)) on or prior to the final day of the Marketing Period;

Note the underlined terms in the second prong of the termination right.  This provides Goodman Global with a termination right if H&F refuses to close the transaction due to a failure of the debt OR equity financing for any reason whatsoever. 

The merger agreement then sets forth in Section 7.2(c) a manner for Goodman Global to receive a $75 million termination fee in such circumstances:

In the event that this Agreement is terminated by the Company pursuant to Section 7.1(e)(ii) and the notice of termination includes a demand, which demand shall be irrevocable, to receive the Parent Termination Fee (a “Parent Termination Fee Notice”), Parent shall pay $75,000,000 (the “Parent Termination Fee”) to the Company no later than two (2) Business Days after such termination. . . .

NB.  Under Section 7.2(d) Goodman Global is also entitled in these circumstances to a repayment of fees and expenses up to $5 million.

But this does not end the matter.  Section 7.2(e) states: 

Anything in this Agreement to the contrary notwithstanding, (i) the maximum aggregate liability of Parent and Merger Sub for all Company Damages shall be limited to $139,200,000 (the “Parent Liability Limitation") . . . .

Section 7.2(e) caps the aggregate liability of H&F to $139,200,000 for any breach of the merger agreement; elsewhere in Section 8.5(a) of the agreement it provides that specific performance is not available to Goodman Global under any circumstances.  So, H&F can absolutely walk from the transaction knowing that its maximum liability under any circumstance is $139,200,000.

So, this begs the question -- what is the reverse termination fee here $75 million or $139 million (3% or 5% of the deal value)?  By the terms of the agreement it is $75 million if all of the conditions are satisfied and only the financing is unavailable.  In such a situation, Goodman Global can terminate and collect the $75 million.  In all other circumstances, Goodman will have to sue for failure of H&F to complete and can receive damages up to the $139 million.  The agreement specifically excepts out specific performance of the bank/hedge fund commitment letters and nowhere does it permit a suit based on the banks' failure to adhere to their commitment letters.  Presumably, although the agreement can be read ambiguously on this point, if the financing is unavailable and Goodman Global can otherwise prove that the conditions to the agreement are not satisfied, it can choose not to terminate the agreement and instead try and collect up to the maximum $139 million. But if Goodman Global decides to choose door number 1 and the $75 million it cannot pursue a greater amount of damages. 

This is important.  Because of the mechanics and incentives of the parties here, I doubt you will ever have a situation where the private equity firm is unwilling to close in circumstances where the financing is available.  Or to again rephrase, if the private equity firm does not want to close, it can collaborate with the financing banks/hedge funds to claim that the financing is unavailable for reasons under the agreement (read, material adverse change, etc.).  In such a case, Goodman Global is faced with a choice, terminate and claim that the conditions are satisfied and receive the $75 million.  Or sue, and attempt to collect up to the $139 million.  Otherwise, the agreement has incentives to push H&F towards payment of the $75 million.  For, if H&F's failure to pay the termination fee:

is not the subject of a bona fide dispute, the Company shall be entitled to seek and receive, in addition to the Parent Termination Fee and/or the expense reimbursement pursuant to Section 7.2(d), interest thereon and the Company’s costs and expenses of collection thereof (including reasonable attorneys’ fees and expenses).

Though theoretically the $139 million is available, the above structure creates bargaining incentives which will push Goodman Global to take the $75 million termination option in almost all circumstances.  It will want to get past a bad deal, terminate as soon as possible, settle around the $75 million and move onward.  The alternative is to be seen as the litigating party, slug through such litigation over the existence of a material adverse effect or some other alleged failure of a condition and try and get a damages claim up to the $139 million.  The extra $50 million is not worth it.  Conversely, the buyer will be able to claim they settled for the lesser amount against an uncertain case.   

And for those who want support that this is what will happen, Acxiom had just such a structure in its agreement and surprise, that was what occurred there (see more here). 

Both 3Com and Radiation Therapy also have similar structures (see the merger agreements here and here, respectively).  Puget Sound has not filed its merger agreement but is not a useful reference due to the long period between signing and closing for a utility deal.  And I think Goodman Global is the best drafted of the three for those looking for precedent. 

I'm very surprised that this is the model that is developing.  I suppose the higher payment permits the seller to trumpet a higher possible reverse termination fee while not having to agree to a financing condition (note that all of the press releases for these deals did not have the formerly usual statement of "There is no financing condition").  Though, again, the parties will naturally gravitate to the lower threshold.  And given the still jumpy credit markets any reverse termination fee creates a higher risk of no completion.  So, for lawyers adopting this model I think they would do well to advise their clients of the incentives in this structure and simplify it.  The Goodman Global model can be built upon to provide a greater certainty of a higher reverse termination fee for the seller -- here the interplay of the two clauses means that the higher cap is likely to be only illusory.  But the additional drafting creates ambiguity.  Lawyers who negotiate this model may do well to simplify it with only one slightly higher fee compromising perhaps at 4%.

Of course,  I still prefer the Avaya model which requires specific performance on the debt and equity commitment letters as a compromise.  Avaya, by the way, closed last week.

Final Thought:  Only Puget of the four has a go-shop provision.  This is an interesting development.  Perhaps parties are realizing the issues with these mechanisms and more carefully considering their use.   On this note, Christina Sautter has a forthcoming article, Shopping During Extended Store Hours: From No Shops to Go-Shops - the Development, Effectiveness, and Implications of Go-Shop Provisions in Change of Control Transactions.  It is an intelligent, thorough look at go-shops and the first of what is likely to be a wave of academic articles on the subject. 

October 28, 2007 in Break Fees, Merger Agreements, Private Equity | Permalink | Comments (1) | TrackBack (0)