Few cases have attracted as much attention in private equity
and leveraged finance circles as the alleged refusal of banks
to fund the $21 billion buyout of Clear Channel Communications
by Bain Capital and THL Partners. The litigation, settled in
mid-May, left some interesting legal questions unanswered, such
as the general enforceability of financing commitment letters
and availability of specific performance in that context. It is
reported that the settlement entailed a lower price for Clear
Channel stock under the revised merger arrangements and
regarding debt facilities, a lower debt amount and increased
pricing. The other financing terms were consistent with the
English and Australian courts have awarded specific
performance to enforce merger and lending obligations. Bidders
and banks that enthusiastically commit themselves in bid
situations with limited outs should take care. They may well be
forced to close the deal.
No financing out
In November 2006, Clear Channel entered into a merger
agreement with entities owned by Bain/THL. The firms had signed
a financing commitment letter with their banks to fund the
acquisition. The commitment letter attached a medium-form term
sheet and included the preparation of fully-negotiated facility
documentation as a condition precedent to funding. There was no
market material adverse change (market Mac) condition precedent
in the term sheet.
During negotiations to finalise the facility documentation,
an email between the banks discussing their intention to renege
on the financing commitment was reportedly leaked to Bain/THL.
The banks had also allegedly admitted that funding the deal
would result in immediate mark-to-market losses on day one, and
that they were trying to recut the deal.
Part of this included a reopening of some fundamental points
reducing the six-year facilities to three years,
preventing the revolving credit facility from being used to
repay existing debt, and prescribing unrealistic baskets for
various negative covenants. On March 26 2008, Bain/THL launched
proceedings in the Supreme Court of New York against the banks,
alleging breach of contract, fraud, deceptive trade practices
and civil conspiracy.
The purchasers did not have the right to terminate the
merger agreement if their financing fell through (there was no
financing out provision). It was imperative for them that the
banks would supply financing, regardless of whether market
conditions changed between the signing of the deal and the time
when the banks were obliged to fund.
The merger agreement had a clause giving the buyer recourse
to the remedy of specific performance but expressly excluding
it as a remedy for sellers. The exclusive remedy for the
sellers was the reverse termination fee. There was no
corresponding specific performance clause in the commitment
The plaintiffs sought to specifically enforce the binding
commitment made by the banks to fund the merger. Their case
included the following claims:
- There was no uncertainty about the commercial terms of
the commitment letter: they were agreed in the term sheet. As
for the remaining terms, the agreement was that they would be
no less advantageous than provisions that appeared in
Bain/THL sponsor precedent transactions.
- There was no market Mac condition precedent. Still, the
banks wanted to exit the deal because of the worsening credit
market conditions in 2007. They demanded terms in the final
documents that were materially different from those in the
commitment letter. The plaintiffs argued that if such conduct
went unchecked, the banks would have succeeded in
reallocating the market risk they had agreed to assume in the
commitment letter to the purchasers.
- The unique aspects of the Clear Channel business meant
that the appropriate remedy was specific performance of the
banks' obligation to fund.
The banks' defence included the following points:
- The negotiation of a final set of transaction documents
was a condition precedent to funding of the transaction.
- The central premise of the plaintiffs' request for
specific performance of the commitment letter called for the
banks to lend money pursuant to documents that still had to
be negotiated. This involved judicial intervention in complex
commercial negotiations, which is unworkable and
- Specific performance of a contract to lend money is
contrary to New York law.
UK and Australian law
Specific performance is a discretionary equitable remedy, by
which the court compels a party to perform its contractual
obligations according to the agreed terms.
For specific performance to be awarded, there must be at a
- An enforceable contract. In the context of financing
commitment documents, although the agreement is usually
subject to negotiation of full documents, the essential terms
of the agreement should be settled at the commitment
- Valuable consideration provided by the plaintiff.
- A breach of contract constituted by a failure to perform
obligations, or an anticipatory breach by the defendant.
Equity will not grant specific performance if an award of
damages at common law will provide enough compensation. But the
adequacy of damages is not the sole point to be considered. The
court's discretionary considerations include the type of
contract and the circumstances under which the contract is
made. Readiness and willingness of plaintiffs to complete their
own obligations under the contract, whether any impossibility,
futility, illegality, delay, hardship or unfairness, or
uncertainty surrounding the performance of the contract would
result, and whether the order of specific performance would
require the prolonged supervision of the court, are all
discretionary considerations the court weighs up in determining
whether to grant specific performance.
For our purposes, performance of a contract could be
impossible or futile because a condition precedent (such as a
market Mac clause) has not been satisfied in the financing
documents or the merger agreement. However, the order for
specific performance could also be made conditional on the
satisfaction of the conditions precedent.
Damages not always enough
A contract for the purchase of shares is a particular type
of circumstance where an award of damages may well be an
inadequate remedy. A contract for the sale of shares will be
enforceable if the shares are not readily available in the
market. It will be enough if plaintiffs can show that they
would have difficulty in obtaining them by other means.
Specific performance of a takeover agreement was awarded by
the New South Wales Supreme Court in Lionsgate Australia
Pty v Macquarie Private Portfolio Management. In that case
the takeover agreement included a specific performance clause,
to which the court expressly referred. In the UK, specific
performance has been awarded in the context of purchasing and
selling shares, in Eid v Al-Kazemi and Baker v
Potter for instance neither of these cases involved
an agreement with an explicit specific performance clause.
Orders for specific performance of loan contracts have not
readily been granted. The general view has been that damages
should be an adequate remedy because the subject matter of the
contract is pecuniary and should be easily obtainable by other
means. As always, there are exceptions to the rule when
the plaintiff's enterprise would be lost if the defendant were
not to fulfil its promise, for example.
Other instances are when the loan agreement is more than a
mere contract for the loan of money because the loan is part of
a wider arrangement with sequential responsibilities. In
Wight v Haberdan Pty a mortgagee was ordered to fund
the plaintiff's purchase of real estate. The loan contract was
held to have been part of a larger transaction including
contractual obligations normally amendable to an order for
specific performance. A contract to lend money was specifically
enforced in the UK in Starkey v Barton in similar
From this, it could be argued that the place of the
financing commitment in an overall buyout transaction, along
with the tight state of credit markets, take the matter out of
the ordinary category of loan agreement and make a decree of
specific performance more readily attainable.
Specific performance is by definition a discretionary
remedy. The inclusion of a specific performance clause means
that the parties have given express contractual acknowledgment
of the inadequacy of damages as a remedy. That is something to
which a court will have regard. To date, we have not seen the
use of specific performance clauses in financing documents. It
will be interesting to see whether they will become more common
in this unstable deal environment. The interaction of a
specific performance clause with any reverse termination fee
provision, Mac clause, financing out provision, and other
conditions precedent in the agreements should be carefully
considered to ensure that they achieve the desired effect.
A more concrete way for borrowers to mitigate the risk of
losing their financing between the signing of binding financing
commitments and funding is to have commitment letters with
long-form detailed term sheets (as opposed to short-form or
medium-form term sheets) or interim facility agreements.
Interim facility agreements developed in the UK and Europe to
bridge this gap; they are essentially short-term bullet
facilities (lasting between 30 and 90 days) to ensure funding
The bullet maturity provides the necessary incentive for
private equity sponsors to refinance it promptly with the
permanent facilities. Interim facility agreements made their
appearance in Australia with KKR's purchase of BIS Cleanaway
from Brambles Australia in 2006. The transaction was funded by
the interim facility. Although interim facility agreements are
not yet a regular feature in this market, the jittery lending
climate may well see an increase in their use.
By Yuen-Yee Cho and Victoria Todd of Mallesons Stephen
On January 1 2009 some changes to the German Foreign Trade
and Payments Act (Außenwirtschaftsgesetz,
AWG) will come into effect that are likely to have a
significant impact on foreign investors wishing to invest in
German target companies. Under the new regime, any such
acquisition by foreign investors may trigger the right of the
German Federal Ministry of Economics to investigate and even
prohibit the transaction.
Who is affected?
Under the Foreign Trade and Payments Act, investors from
non-EC countries that do not belong to the European Free Trade
Association (EC plus Switzerland, Norway, Iceland and
Liechtenstein) and that acquire shares representing 25% or more
of the voting stock of a German company may have their
acquisition investigated by the Federal Ministry of Economics.
Shares held by companies controlled by the acquirer (by holding
at least 25% of the voting stock) are treated as if they were
held by the acquirer itself. Shares that are subject to voting
agreements are also assigned to the acquirer.
If the Ministry comes to the conclusion that Germany's
public order or national security are threatened by a
transaction, it may prohibit the acquisition. Unfortunately,
the Act does not contain any definition of public order or
national security, so the Act brings a certain degree of
uncertainty about which transactions fall within its scope. If
the Ministry decides that a transaction falls within the scope
of the Act, it may order that the acquisition (which may
already be consummated) be reversed. The Ministry may also
choose only to prohibit the exertion of voting rights of shares
held by the foreign investor, thus restricting the investor's
influence on the German target.
How long does it take to reach a decision?
Foreign investors are under no obligation to file their
transaction with the Federal Ministry of Economics. However,
they may do so after signing and will, in that case, receive a
final decision on whether the transaction will be prohibited
within one month. If the transaction is not filed with the
Ministry, it may start an investigation on its own account
within three months after the consummation of the transaction,
with the effect that the transaction is put under the condition
precedent of the Ministry's approval. The Ministry will
immediately inform the investor of its decision to investigate
the acquisition, which triggers the acquirer's obligation to
provide the Ministry with data. The acquirer will be informed
about the specific data required by the Ministry through an
announcement in the Federal Gazette (Bundesanzeiger).
The investigation must be completed within two months of
receipt of the transaction data.
Aims and criticism
The reform seeks to protect sensitive branches of German
industry such as the energy, telecom and military sectors.
Potential threats are perceived to come from state-controlled
funds (in particular from China, the Emirates and Russia) that
may be used to influence German politics via investments in
German key enterprises. State-controlled foreign corporations
have also been classified as potentially dangerous.
The reforms have attracted much criticism. For example, the
new powers granted to the Ministry of Economics are suspected
of infringing the freedom of capital movement as guaranteed by
Article 56 of the EC Treaty. The European Commission is
planning to examine the Act for its reconcilability with
Article 56 and the freedom of establishment (Article 49). Also,
the scope of the Act is considered to be unreasonable because
it not only restricts investment from foreign countries,
state-owned funds or state-controlled corporations but foreign
investors in general. Any private equity investor wishing to
invest in Germany may find his transaction being investigated
by the Federal Ministry of Economics.
The problem for foreign investors
The main problem is the legal uncertainty for foreign
investors. If an investor has successfully completed a
transaction, it may still be subject to investigation for a
period of three months after the closing date. A further two
months may pass until the Ministry has completed its
investigation. The result may be that the transaction is
prohibited and the acquisition must be reversed. This
uncertainty is unacceptable for the seller, buyer, target,
financing banks and employees of the target company.
Recommended course of action
Foreign investors wishing to acquire 25% or more of the
voting stock of a German company should therefore adhere to the
Informal enquiry before signing
A foreign investor can contact the Federal Ministry of
Economics before he signs a share purchase agreement on a
confidential and informal basis in order to find out if the
Ministry will investigate the transaction. A similar approach
is generally taken if a bidder wishes to know the position of
the German Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht, BaFin) on a
takeover process. There are no guidelines on how such an
informal approach should be made, though any informal contact
bears the risk that information may be leaked. A seller is
therefore unlikely to agree to such contact.
Filing for investigation after signing
Therefore, a foreign investor should voluntarily file the
transaction with the Federal Ministry of Economics immediately
after signing a share purchase agreement. He should refrain
from filing only if he and the seller are in no doubt that the
transaction does not qualify for an investigation by the
Ministry. If the investor intends to file the transaction, the
share purchase agreement should contain a clause that makes the
clearance of the acquisition by the Ministry a condition
precedent for the obligation of the parties to consummate the
transaction. After the Ministry has received all relevant data,
it has one month to decide whether it will prohibit the
consummation. In order to speed up the process, the investor
should agree with the Ministry on which information it needs in
order to come to a decision as quickly as possible. It appears
likely that an investor will, in most cases, be able to get a
decision before the German Federal Cartel Authority
(Bundeskartellamt) has cleared the transaction.
Therefore, the filing of the acquisition should not lead to
delay in most cases.
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