USA – WASHINGTON, DC Trends and Developments Contributed by: Nicholas S. Johnson, Jonathan S. Deem, Jennifer S. Fahey and Japera A. Parker, Bailey & Glasser, LLP
• limitations on the scope of required behavioural remedies; and • geographic limitations on the jurisdictions in which aggressive remedies must be pursued. The negotiation of these carve-outs requires careful analysis of likely regulatory theories and remedies to ensure that carve-outs do not so comprehensively limit the hell-or-high-water commitment as to render it commercially meaningless. Co-ordination and consent rights Regulatory efforts covenants also typically address the allocation of control over regulatory strategy between the buyer and the seller, including the extent to which the buyer must consult with and obtain the consent of the seller before making regulatory filings, submitting to interviews, offering remedies, or accepting condi - tions. In transactions where the seller retains opera - tional responsibility for the target business pending closing, sellers have a strong commercial interest in influencing regulatory strategy, particularly with respect to remedies that may affect the post-closing business. The appropriate scope of seller consent rights – and the standard governing disagreements between the parties over regulatory strategy – is a frequently contested negotiating point. Reverse termination fees and specific performance In transactions where regulatory failure is a meaningful risk, the consequences of that failure for the buyer – specifically, whether the seller is limited to a reverse termination fee or can compel the buyer to close – are among the most commercially significant deal terms. The reverse termination fee mechanism A reverse termination fee (RTF) is a payment made by the buyer to the seller upon termination of a merger agreement in circumstances where the buyer fails to close for specified reasons, including regulatory fail - ure. In transactions with significant regulatory risk, the RTF serves as the buyer’s effective “walk away” price – the fee represents the buyer’s maximum financial exposure if it is unable or unwilling to obtain regulatory approval and the deal fails to close. RTF sizing in regulatory failure scenarios has evolved significantly in recent years. In earlier market cycles,
regulatory failure RTFs of 3% to 5% of deal equity value were common. In more recent large transac - tions with meaningful regulatory risk – particularly CFIUS-related risk – RTFs in the range of 6% to 10% of equity value have been observed, reflecting both the increased severity of regulatory risk and sellers’ demands for greater deal certainty. In extreme cases, such as transactions involving critical national security considerations, RTFs above 10% have been negoti - ated. Specific performance versus RTF exclusivity The tension between specific performance rights – the seller’s right to compel the buyer to close or to force the buyer to use its best efforts to obtain regulatory approval – and RTF exclusivity is one of the defining negotiations in large M&A transactions. Sellers gen - erally prefer to retain specific performance rights as long as financing is available and regulatory approv - als remain obtainable in principle. Buyers generally prefer RTF exclusivity, which provides a clean exit at a defined cost. The resolution of this tension typically involves tiered structures: the seller may have specific performance rights to compel the buyer to pursue reg - ulatory approvals aggressively up to the outside date, but once the outside date has passed or regulatory approvals have been finally denied, the seller’s remedy is limited to the RTF. Deal structure modifications to reduce regulatory exposure Beyond contractual risk allocation, deal lawyers have increasingly focused on upfront transaction structure modifications designed to reduce the regulatory foot - print of proposed transactions – effectively building regulatory strategy into deal architecture from the outset. Pre-signing divestitures and carve-outs In transactions where antitrust risk is concentrated in specific overlapping businesses, buyers and sellers have structured transactions to include pre-signing commitments to divest specified assets or business - es simultaneously with or prior to closing the primary transaction. By proactively addressing the most obvi - ous competitive concerns before regulatory review commences, parties can reduce review timelines and the risk of more extensive regulatory intervention.
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