Jenner & Block

SuperConference: Deals Gone Bad

When can the buyer of a company or of a business walk away from a corporate deal before it closes, and what kinds of remedy does the seller have if the buyer walks?

This was a key topic of the May 21, 2008, SuperConference session on "Deals Gone Bad," moderated by Jenner & Block Partner Ross B. Bricker. Case law in this area has undergone considerable change in the past few years, the panelists said.

Before the IBP v. Tysons case in Delaware state court in 2001, said Stephen A. Tsoris, Assistant General Counsel of the SPX Corporation, buyers "liked the material adverse change clause," a commonly used contract clause that permits a buyer to cancel a deal if it could show that a material adverse change had occurred between agreement and closing of the deal. 

"But IBP changed the landscape," Tsoris said. "The court did a substantive business analysis and found that IBP's poor busiiness performance didn't constitute a MAC [material adverse change], and the court ordered specific performance of the merger agreement."

Kevin L. Lilly, Senior Vice President, Secretary and General Counsel of SPX, said that if he were representing a buyer, he would want a strong MAC clause.

"But IBP introduces a new level of uncertainty," Mr. Lilly said. "The clause was intended to provide more certainty, but now, I'm not sure that it can."

Michael J. Kennelly, Managing Director of the Huron Consulting Group, said that because of current economic conditions such as the credit crisis, the entire "deal environment" has gone bad. There are fewer transactions, and those that do take place are taking more time and effort to complete.

Jenner & Block Partner David J. Bradford, another panelist, analyzed a very recent Delaware case, United Rentals, Inc. v. RAM Holdings, Inc., in which the court ruled that after the agreement by RAM Holdings, a subsidiary of the large private equity fund Cerberus Capital Management, to buy United Rentals had fallen apart, Cerberus merely had to pay a specified break-up fee rather than be compelled to complete the deal.

"The court found that a party, in this case United Rentals, would be bound by a provision if it understood it during negotiations and didn't object. This is a slightly novel application of the 'forthright negotiator' principle," Mr. Bradford said.