M & A - How to Address Antitrust Risks

Relevant covenants and provisions in an acquisition agreement that address anti-trust issues and risks:

• Covenants specifying the level of efforts that the buyer has to engage in to get clearance and whether the buyer is or is not obliged to actually litigate with the antitrust authorities. If so, administrative or judicial proceeding, which can be a protracted and very expensive process when litigating an anti-trust case with the United States of America.
• Covenants specifying what divestiture obligations the buyer has committed to. For example, an agreement could say that the buyer has to make any divestiture that would not have the effect of materially impairing the value of the acquisition to the buyer. Or it could say that the buyer has to make any divestiture that does not have a material adverse effect on the combined company, in an effort to invoke the very strict standards of at least the Delaware case law of when something has reached a level of severity sufficient to constitute a material adverse effect. Some agreements, instead of these subjective approaches, specify very objective criteria (e.g., the buyer must be willing to divest a specified asset, or to divest assets that generate no more than a specified amount of EBITDA. In some industries, potential divestitures may be defined differently. In an airline merger, for example, the agreement might say that the parties have to be willing to divest a certain number of landing slots at a particular airport and associated gates.), which raise the concern that they are giving the anti-trust government agencies a road map as to what remedy they can get given HSR filing obligations.
• Litigation out closing conditions. What should be the threshold to walk? A litigation or an injunction? If parties agreed that the parties are obligated to litigate the matter to conclusion with the anti-trust authorities, it iss appropriate to say that the presence and pendency of that litigation by itself does not a cause a condition to fail. On the other hand, if the agreement is that there is no need to litigate, then it iss logical to say that if there is a pending anti-trust litigation at the time set for closing, the parties are excused from closing. Similarly, the "drop dead" date needs to be negotiated with a view to allowing enough time for whatever process is contemplated by the parties to play its way to the end.
• Reverse breakup fee as an alternative way to address the risks. Some agreements, instead of, or in addition to, defining levels of efforts and levels of divestiture, provide for a financial remedy, a so-called reverse breakup fee, where the buyer will agree that if the deal fails because of an anti-trust challenge, for example, it will pay the target company a defined fee. In order of magnitude, that fee is often 6-8% of the deal value, sometimes more, sometimes less. The breakup fee is an attempt (and incentive) to give the target some compensation for having gone through the process, only to have the transaction fail. It also provides some assurance to a target that the buyer won't just walk away from a challenge, because it's going to be very expensive for it to do so. You also will see reverse breakup fees very commonly utilized when there are competing bidders for the same property, and one presents more antitrust risk than the other. In an auction, the buyer presenting the greater antitrust risk may very well say that the way they can compensate the target and encourage the target to take their deal is to agree to pay a reverse breakup fee.