Publication Date: May 26, 2020
More than half of recently terminated M&A deals due to COVID-19 have involved private equity acquirers. This is not a coincidence, in our view. During times of economic stress, private equity firms (“sponsors”) find themselves increasingly strained to secure financing and take advantage of their abilities to negotiate merger agreements in their favour. To protect themselves, sponsors prioritise capping their maximum liability upon termination due to a willfull breach while limiting their takeover targets’ recourses. This generally leads to sponsors having the option to lapse deals under multiple circumstances. While it may seem as though targets have ample remedies in the form of specific performance rights, reverse termination fees and recovery for damages, penalties are rarely sufficient to dissuade sponsors from attempting to walk away from a leveraged buyout. In this report, we explore the ways in which private equity acquirers frequently lapse transactions: mutually agreeing to terminate, invoking a MAC, invoking “other” conditions, citing a target breach of covenant, and simply repudiating agreements. Our focus is on global public-to-private LBOs and the sturdiness of merger agreements when sponsors try to walk. We assess five pending major LBOs to anticipate how sponsors may react, drawing from precedents during the current COVID-19 pandemic and the credit crisis in 2007 and 2008.
1. COVID-19 Impact on M&A: Lapsed and Struggling Deals to Date 2. Target Remedies: Specific Performance, Termination Fees and Damages 3. Acquirer Protections: Shells, Liability Limitations and Optionality 4. Mutually Agreeing to Terminate: Avoiding Courts 5. Invoking a Material Adverse Effect: Weak Language and Carve-Outs 6. Invoking “Other” Conditions: Specific Opportunities to Walk 7. Citing Target Breach Covenants: Shifting the Blame 8. Repudiating the Merger Agreements: Testing the Courts 9. Risks and Recommendations: El Paso, Forescout, LogMeIn, Tech Data, NIBC 10. Language Disclosed in Deal Documents • El Paso Electric / J.P. Morgan Investment Management • Forescout Technologies / Advent-led Consortium • LogMeIn / Francisco Partners-led Consortium • Tech Data / Apollo Global Management • NIBC Holding / The Blackstone Group
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