October 1, 2019

Termination Fees: Should Sellers Push for PE Buyers’ “Clean Break”?

Financial buyers used to insist on financing conditions in their acquisition agreements.  They learned long ago that a financing condition usually ramped up their offer’s uncertainty beyond what public company boards were willing to stomach.  In order to remain competitive with strategic buyers, they abandoned the financing condition and opted to instead offer up a reverse termination fee that would come into play if they couldn’t finance the deal.  But the terms of those deals made it clear that, as far as the seller was concerned, that reverse termination fee was all they were going to get.

While that combination of reverse termination fee and exclusive remedy provisions has become almost universal for deals involving private equity buyers, that’s not the case when it comes to strategic  sellers.  As this Cooley blog points out, not only do they rarely get maximum liability caps, but their ability to assert that the termination fee is an exclusive remedy is usually contingent on their compliance with other deal terms.

In the wake of the Delaware Chancery Court’s recent decision in Genuine Parts v. Essendant, the blog suggests that strategic parties would be wise to push for the kind of “clean break” that private equity buyers have been able to negotiate.  Here’s an excerpt:

The Genuine Parts decision highlights why strategic parties would be wise to take a page out of the financial buyer’s exclusive remedies playbook. For a board of directors of the target company, the certainty of a clean break from a prior transaction is crucial and can raise questions that could factor into a board’s decision-making when evaluating competing bids.

Should the board discount the financial terms of a competing bid for the risk attendant to possible litigation above and beyond the payment of the termination fee? Will potential competing bidders be more reluctant to make competing offers if the potential cost is greater than the termination fee? Worst of all from the intervening buyer’s (and target company’s) perspective, when the payment and acceptance of the termination fee does not act as a bar to further claims, the intervening buyer essentially funds the aggrieved first buyer’s litigation case (which was never the intent of the termination fee).

The blog doesn’t suggest that a target’s failure to comply with a non-solicitation covenant should just be shrugged off – but it says that the better approach would be to require the jilted buyer to elect its remedies & either accept the termination fee or take its chances in court.

In situations where the buyer may not know whether the seller breached its obligations at the time it needs to make this decision, the blog says the appropriate alternative may be to sue the buyer for tortious interference. As I blogged over on “John Tales” a while back, there’s some very interesting case law on tortious interference with an acquisition agreement.

John Jenkins