An End to Specific Performance?
A recent spate of private equity cases has turned on the question whether the buyer has the right to walk away from a deal and pay a fixed price, known as the reverse termination fee. Rather than be spurned, the target clutches at the specific performance clause in the merger agreement, and tries to push the deal through. This year, so far, of the seven announced private equity deals for public companies, all have had reverse termination fees. Moreover, each of the seven deals explicitly barred specific performance of the agreement.
As a result, private equity sponsors have the option to walk away from the deal for a fixed cancellation price. In this environment, where guaranteed financing terms just aren't available, probably no other structure is possible for a leveraged deal.
The recently announced deal to buy Getty Images, the pictures and video distributor, for $2.4 billion including debt, marks this trend. The private equity firm, Heller & Friedman, rejected specific performance language and even added "no recourse" language directly in the merger agreement. No recourse language typically states that the seller cannot directly sue the private equity firm for damages or specific performance. In Getty Images the merger agreement language states:
“[Getty Images] acknowledges and agrees that it has no right of recovery against, and no personal liability shall attach to, in each case with respect to [The Reverse Termination Fee Liability Limitation], any of the [Hellmann & Friedmann] Parties (other than [Acquisition] Parent to the extent provided in this Agreement and the Guarantor to the extent provided in the Limited Guarantee), through [Acquisition] Parent or otherwise, whether by or through attempted piercing of the corporate, limited partnership or limited liability company veil, by or through a claim by or on behalf of [Acquisition] Parent against the [Private Equity Fund] Guarantor or any other [Hellmann & Friedmann] Party, by the enforcement of any assessment or by any legal or equitable proceeding.”
It seems that parties have become disenchanted with the idea of specific performance as a remedy. The courts have been reluctant to decree a merger, perhaps due to the significance of the remedy. After all, how does one order the merger of two parties when one of them has changed its mind? A merger requires willing parties on both sides to make things work. Money, careers and even communities hang in the balance. The remedy itself seems unrealistic in the context of business combinations.
