August 01, 2012
Moderated by Latham & Watkins partner Luke Bergstrom, this on-demand webcast also features Latham partners David Allinson and Josh Tinkelman.
Listen to the “M&A in an Uncertain World – Private Equity Rights and Remedies” webcast. The on-demand webcast is available online through November 11, 2012.
How did the 2007/2008 financial crisis impact deal architecture?
Allinson: The large number of failed transactions and defaults during the financial crisis in 2007/2008 resulted in new paradigms for addressing the historic tension between sellers’ desire for deal certainty and a private equity sponsor’s desire to limit its financial exposure to financing failures and other risks as well. To conclude, however, that there is a single new market standard for addressing and resolving deal certainty would be over simplistic.
In light of the almost 170 billion in aggregate enterprise value bidder initiated terminations during the 2007/2008 time period, it is unmistakable that sellers’ remedies and buyers’ exposure for financing and other failures have evolved considerably in the past few years. Even if the deal structures look similar on their face, we do have an evolving paradigm for deal architecture.
What interest does each party have the in provisions included in the acquisition agreement and the debt commitment letter?
Tinkelman: When you look at these provisions, the debt commitment letter and the remedies provisions, it is really a three person process. The bank will obviously pay keen attention to how the acquisition transaction is being set up between the buyer and the seller because they view those provisions as being relevant to the potential liability of the bank may have to the buyer in case of a busted deal. It is pretty universal that in the debt commitment letters the obligations of the bank are limited to direct damages, not consequential or punitive. So, for example, if there is a reverse termination fee in the acquisition agreement between the buyer and the seller, the bank will like the deal to be structured so that that is a cap on the most it will ever be liable for a breach under the commitment papers or really anything else relating to the transaction.
Similarly, the buyer and the seller are going to have a very keen interest on how the commitment papers are setup because that will form the backdrop for a lot of the deal risk that is trying to be addressed by the remedy provisions.
What trends have you seen in terms of reverse termination fees?
Bergstrom: Over time, what we have seen is that reverse termination fees have tended to increase relative to the typical size of break fees for a fiduciary out. Currently what we are seeing is reverse termination fees in the four to seven percent range commonly, which represents a significantly higher proportion of a private equity buyer’s actual equity commitment to the deal — typically anywhere in the range of 10 to 30 percent of the equity commitment being made by the fund itself.