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— Judgment Call —
The novel arguments raised in the Clear Channel Communications Inc. litigation earlier this year demonstrated certain pitfalls with debt commitment letters and could affect these letters for many years to come. The litigation arose from one of the last large leveraged buyout transactions to be signed immediately before the credit crunch of 2007, when in May 2007, Bain Capital Partners LLC and Thomas H. Lee Partners LP signed a merger agreement in which they agreed to pay $39.20 per share for Clear Channel. Concurrently with the merger agreement, sponsors Bain and Thomas H. Lee and a bank group led by Citigroup Inc. signed a 71-page commitment letter. After the credit crunch began in the summer of 2007, the banks apparently approached the sponsors seeking about $600 million in concessions. The sponsors rebuffed the banks' efforts to renegotiate the transaction, which allegedly caused the banks to go to "war" to kill the deal, according to the plaintiffs.
The sponsors alleged the banks demanded onerous deal terms that were at odds with the commitment letter and that the banks knew the sponsors could not accept. The sponsors alleged that the banks feigned good-faith negotiations while attempting to delay the closing until the June 12 deadline. The sponsors then sued the banks in New York federal court to force them to "specifically perform" the commitment letters. Clear Channel joined the financial sponsors in suing the banks in Texas state court for $26 billion in damages, alleging intentional interference with contract. By denying the motion for summary judgment, the federal court effectively held that specific performance can be an available remedy for loan commitments in certain non-real estate transactions. In May, after the banks' motions for summary judgment were denied, the parties settled the dispute. The sponsors agreed to pay a reduced purchase price -- $36 per share -- and the banks agreed to finance the deal. In light of Clear Channel, certain lenders are now aggressively seeking waivers of specific performance in debt commitment letters. If sponsors are unsuccessful in removing waivers of specific performance, they need to get comfortable with such waivers on a couple of grounds. First, most commitment letters will be much less detailed than the 71-page commitment letter in Clear Channel and therefore would be difficult to specifically enforce by the sponsor in any event. Second, most middle-market transactions will contain a much shorter preclosing period than in Clear Channel, such that a market disruption during that period is less likely to occur. Since Clear Channel was one of the last deals during the covenant-lite era, the deal's commitment letter did not include "market flex" or "syndicability" language. Now that the credit crunch has hit, it's doubtful lenders will sign a substantial commitment letter that does not include these provisions. What's more, lenders may seek ever-more-onerous market flex language, including language that permits modifications to noneconomic deal terms. Sponsors will attempt to limit this language to the economic deal terms and seek to impose limits on changes to economic terms. Commitment letters will likely be shorter and less detailed than the 71-page letter in Clear Channel so as to make the letter difficult to specifically enforce. Sponsors will need to argue that they need more detail in the commitment letter to ensure few future surprises with the financing. Sponsors may also try to push this issue onto the seller by requesting financing contingencies or for lower reverse breakup fees if the lender fails to fund. In light of the intentional interference claims against the banks brought in Clear Channel, lenders could become actively involved in reviewing the claims limitation language in the acquisition agreement. In Clear Channel, the $500 million reverse termination fee apparently did not preclude tort claims, such as intentional interference of contract. Therefore lenders may start seeking waivers of tort claims and ensure that the reverse termination fee limits damages against lenders. Lenders should be able to enlist the sponsors as an ally in these discussions. Peter L. Harris is an attorney in the financial restructuring practice group at Dorsey & Whitney LLP in Minneapolis. |
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