DealLawyers.com Blog

A recent lawsuit involving a buyer’s attempt to terminate a deal based on a seller’s alleged non-compliance with the purchase agreement’s financing cooperation covenant raises the question of when a buyer should have the right to walk away from a deal on that basis. Here’s a description of the lawsuit from this article in Weil’s Private Equity Sponsor Sync newsletter:

In Omni Newco, LLC v. Forward Air Corporation, Forward Air entered into a definitive agreement to acquire Omni by way of merger for a combination of cash in the amount of $150 million and stock in Forward Air, the cash component of which would be financed using debt. In connection with Forward obtaining acquisition debt financing, Omni agreed to certain customary financing cooperation covenants, including providing reasonable access to Omni’s books and records, furnishing information, and using reasonable best efforts to cooperate with Forward’s financing efforts during the
interim period. While negotiating the merger agreement,

Omni sought, but did not succeed in obtaining, a provision that failure for it to comply with these obligations would only result in the closing condition regarding covenant performance not being satisfied if and to the extent that the buyer was not able to obtain its debt financing as a result of Omni’s breach. Essentially, Omni didn’t want its efforts to help the buyer obtain acquisition financing to be a potential reason Forward could refuse to close.

The parties resolved their differences on the eve of trial, but the article says that the dispute highlights the need to consider whether a financing cooperation covenant should give rise to a termination right based on covenant non-compliance only if the buyer’s financing is not obtained as a result.  From a seller’s perspective, limiting the buyer’s right to walk away in this fashion enhances deal certainty, but the article cautions that a record of trying to include language addressing this directly & failing will create a potentially problematic “legislative history” in the event of litigation.

– John Jenkins