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Deals involving significant antitrust risk usually contain fairly elaborate covenants governing the parties respective rights and obligations with respect to the HSR merger review process.  However, in many instances, these covenants contain vague wording that can result in disputes between the parties in the event that regulators object to the deal.

This Perkins Coie memo addresses the issue of vague language in antitrust covenants and provides some thoughts on how to better craft language in order to avoid later disputes. This excerpt summarizes the problem:

When a transaction requires antitrust review under the Hart-Scott-Rodino (HSR) Act or foreign merger control laws, merger agreements generally include antitrust-specific provisions detailing the level of effort the buyer must exert to move the deal through merger review. Such terms typically consist of “best efforts,” “reasonable efforts,” or “reasonable commercial efforts.” In rare cases, a buyer may be required to undertake “any or all necessary actions” to obtain clearance, including divestiture of assets or changes in commercial relationships between the buyer and third parties (known as “hell or high water” obligations). But these terms are inherently vague, and in the context of antitrust-related obligations, there is little or no judicial guidance on precisely what actions they require.

For example, assume that following a 30-day preliminary investigation, the FTC or U.S. Department of Justice (DOJ) issues HSR “second requests” to the parties. Compliance with these requests may delay the deal 10 or more months and require the buyer (and seller) to incur well over a million dollars in legal fees and related expenses. Does a “best efforts” clause require the parties to comply with the requests? Assume that following compliance, the agency threatens to block the deal in court. Must the parties litigate the case?

A related issue is whether the termination provisions of the agreement address the possibility of an investigation. If the “outside” (or “drop dead”) date arrives, can the buyer or seller simply walk away from the deal without liability to the other? This lack of clarity can invite “broken deal” litigation where one party to an unsuccessful deal sues the other for failing to put forth the “efforts” required to obtain merger clearance.

The memo says that there has been an increase in broken deal litigation in recent years, and recommends that parties should include more specific and objective criteria for their respective obligations in the event of a challenge.  Such language should specifically address the extent of a buyer’s obligation to respond to a second request, divest certain assets, or litigate an agency’s challenge to a transaction.  The memo also notes the increasing use of reverse termination fees as a potential method of preventing litigation.

– John Jenkins