December 2, 2020

Busted Deals: Why Litigate If You’re Just Going to Renegotiate?

We’ve seen quite a few high profile Covid-19 busted deal cases  that started out in litigation end up with a negotiated resolution. That’s not unusual; after all, many buyers use the threat of an MAE out as leverage to reopen valuation discussions. But in a recent blog, Alison Frankel raises an interesting question: “If both parties know the endgame is revised deal terms or a negotiated breakup fee why go through the expensive rituals of litigation? Wouldn’t it be more efficient to skip the whole litigation detour and go straight to settlement talks?”

Alison acknowledges that many deals do get renegotiated without litigation, but she asked a number of experts about why companies resort to litigation. These include former Delaware Chief Justice Leo Strine, Tulane Prof. Ann Lipton, and Widener Prof. Larry Hamermesh. Here’s an excerpt with their responses:

For buyers, the threat of MAE litigation is leverage, especially after Delaware Chancery Court ruled for the first time, in 2018’s Akorn v. Fresenius, that an acquiring company was entitled to walk away from a deal because the target had experienced an MAE. “It’s a way to force the target to the bargaining table,” said Lipton, the Tulane prof, by email. “The target may not want to roll the dice or live with prolonged uncertainty even if the odds are in its favor.”

Delaware law professor Hamermesh said that just bringing an MAE case can be a boon to buyers if the target’s business continues to decline. Litigation, he said, extends uncertainty for the company being acquired. That can mean extra pressure on the operating business, which might work to the buyer’s benefit in renegotiations of the deal price. “Time is on the buyer’s side,” he said.

Judges might not be thrilled about buyers using their courts more for leverage than to obtain actual decisions on their claims, Hamermesh said. Interestingly, though, longtime Delaware jurist Strine suggested in an email that court deadlines in MAE proceedings can force buyers to “face reality.” Strine noted that MAE provisions – which he calls “renegotiation clauses” – often lead to peaceable re-pricing agreements. But when the buyer and seller end up in court, Strine said, “the guarantee of a prompt trial and, as important, swift resolution to appeals limits the time for games playing.”

Shareholder pressure also factors into the mix. If a buyer’s shareholders feel the price is too rich, it may feel compelled to press an MAE claim in court. On the other hand, a seller’s board may fear shareholder suits if it agrees to price concessions without compelling the buyer to bring a lawsuit seeking to terminate the deal.

Of course, not every lawsuit ends up in a renegotiated deal. Earlier this week, Vice Chancellor Laster issued his opinion in AB Stable VIII v. Maps Hotels, (Del. Ch.; 11/20), in which he held that, although a seller did not suffer an MAE due to an applicable pandemic-related carve-out, its breaches of the ordinary course covenant & other contractual obligations gave the buyer the right to walk away from the deal. I’ll blog more about the case later, but it’s one of the Vice Chancellor’s 200+ page specials, so I’m still digesting it.

John Jenkins