Counsel to Counsel - May 2008 - (Page 17)

On the rocks but at least they won’t be blind-sided by them later. “We never used to ask a buyer to prove they had money,” O’Connell says. “It was: ‘Oh, you’ll pay us more? Great. We like you best.’” Now she says some sellers may choose to go with a lower bidder whose financing is ironclad, versus a higher bidder who may not be able to follow through. O’Connell also suggests managing a very short exclusive period with the buyer and building in deadlines that subtly speed the closing. For example, specify the dates by which the draft purchase agreement or due diligence must be completed—a missed deadline enables the seller to disengage and start negotiation with another buyer. This keeps the buyer on its toes and lets the seller out of a deal that’s going nowhere. “When things slow down with a buyer, it’s often because they’re having trouble getting their financing in place and they don’t want to spend the money,” she says. The credit crunch and distressed economy are putting more and more deals in jeopardy. A few recent examples: United Rentals, Inc. In November 2007, Cerberus Capital Management, L.P. called off its planned buyout of United Rentals, Inc. Cerberus simply changed its mind, walking away from the $4 billion deal without the usual invocation of MAC clauses or financing woes. United Rentals, Inc. sued, seeking damages above the $100 million termination fee, but a Delaware court denied the claim, citing ambiguous wording in the merger document. The Home Depot, Inc. Declines in the housing market nearly scuttled the proposed sale of The Home Depot, Inc.’s wholesale supply unit to three private equity firms. After renegotiation, the seller was forced to accept less favorable terms, including financing $1 billion of the debt itself and maintaining a 12.5 percent equity stake in the business. The deal closed in August 2007 at $8.5 billion, about $1.8 billion less than the original price. Harman International Industries, Inc. Poor financial performance caused private equity firm Kohlberg Kravis Roberts & Co. and investment bank Goldman Sachs Group, Inc. to back away from an $8 billion buyout of Harman International Industries, Inc. The parties settled out of court in October 2007, with the buyers agreeing to buy up to $400 million in company bonds, exchangeable for shares at a rate 13 percent below the original buyout offer. Harman also had to waive its $225 million termination fee. Sallie Mae J.C. Flowers & Co. LLC blamed adverse changes stemming from the College Cost Reduction and Access Act in its termination of a $25 billion purchase of the college loan giant SLM Corporation (commonly known as Sallie Mae) in September 2007. Tightening global credit also contributed to the deal’s failure. Sallie Mae sued, seeking $900 million in damages but dropped the case in January after completing a $31 billion funding round. MAC Attack There was a time when merger agreements were largely composed of contractual boilerplate. But the greater specificity you can build into your document, the less chance you will have of an adverse outcome, and the better your chances of getting adequate compensation if things fall through. The top priority is tailoring closing conditions, particularly MAC clauses, to your company’s situation. “No one is going to come to you and say, ‘We changed our mind. We’re breaking the agreement,’” Gilson says. “They’re going to say, ‘Well, your sales in region three weren’t as you told us.’ Or they are going to blame it on their lender, or say your EBITDA wasn’t where it should be. There’s always some excuse. Given that, make sure you have the language you need in the agreement to identify valid reasons and the remedies that follow.” Gilson says general counsel need documents that are clear about what the buyer’s obligations are to complete the transaction, about when and how they can walk away, and what the alternatives and ramifications are if they choose not to close the deal. Sellers tend to narrow these clauses, and buyers want them as broad as possible, but in the end it’s best for everybody to have them specifically negotiated in detail. martindale.com/c2c “There has to be a meeting of the minds, and it has to be reflected in the documents,” he says. The list of contingencies to consider is long: What happens if financing falls through? What if the economy or industry suddenly tanks? Does a terrorist attack trigger the MAC clause? What remedies do you have if the buyer simply gets cold feet? Can you get specific performance that forces a sale? What are the damages if the seller walks away? Is there a cap on the damages? Drafting language that deals with the possibilities creates a faster, clearer process for all parties. “In the end, both sides should welcome certainty regarding their rights and obligations,” Gilson concludes. “You really don’t want to get in the situation where you’ve told everybody that you have a deal going on—your customers, your work force, your banks—and then all of a sudden it breaks. Trying to pick up those pieces can be very difficult.” Husch Blackwell Sanders LLP is a litigation and business services law firm representing national and multinational corporations. Many of the firm’s clients are leaders in real estate development, energy, financial services, healthcare and manufacturing. The firm is nationally regarded for its work in Litigation, Environmental & Regulatory, Finance & Lending, Insolvency & Commercial Bankruptcy, Mergers & Acquisitions, Real Estate and Tax. Article Participants: Gary D. Gilson Partner gary.gilson@huschblackwell.com Peer Review Rated Mary Anne O’Connell Partner maryanne.oconnell@huschblackwell.com Peer Review Rated May 2008 17 http://www.martindale.com/c2c

Table of Contents Feed for the Digital Edition of Counsel to Counsel - May 2008

Counsel to Counsel - May 2008 Contents Harassment Policies NEC Corporation of America and Duane Morris LLP Lost or Stolen Data: Minimizing Fallout On-Boarding the Board Drafting Fair, Efficient and Enforceable Arbitration Agreements Responding to Counterfeit Products Crafting an English-Only Workplace Policy Distressed Debt: New Players, Global Sophistication Make Restructuring More Complex IP Confidential: Plan Ahead, Act Fast to Protect Your Trade Secrets Adverse Changes: Think Ahead in a Strained M&A Market Optimizing Web 2.0 Technology: Expanding Your Professional Network Union Pacific Railroad Company and Patton Boggs LLP Warming Warning: Develop Your Climate Change Strategy Now Risk Sharing: Expect New Obstacles and Expenses in Syndicated Loans E-Discovery in Action Diversification at the Gate Energy

Counsel to Counsel - May 2008

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