ROMANIA Law and Practice Contributed by: Ileana Glodeanu, Andreea Cărare, George Ghitu and Delia Dumitrescu, Wolf Theiss
6.6 Break Fees In private equity acquisitions, parties very rarely (if ever) agree on break fees in favour of the seller if the buyer breaches the acquisition agreement or is una - ble to consummate the transaction due to a lack of financing (“reverse break fees”). This usually happens only when the seller is in a strong position or agrees to offer an exclusivity period to a potential buyer when a competitive bid would have been an alternative. There are no legal limitations on the value of break fees, but there may be contractual limitations – either capping the break fee at a certain percentage of the deal value or limitations related to situations created by action/inaction of the party in default of its obliga - tions under the transaction documents (buyer’s ina - bility to secure financing, failure to obtain necessary internal approvals, exceeding the exclusivity period, etc). In other jurisdictions, break fees might range from 1% to 3% of the deal value, but in the local market this tends to be open and subject to negotiation, depend - ing on the specific circumstances of the deal. 6.7 Termination Rights in Acquisition Documentation Commonly, acquisition agreements are designed to exclude all rights of the parties provided under the law to terminate the contract, to the fullest extent pos - sible. Therefore, termination rights of the parties are generally limited to what is provided by mandatory law and what cannot be excluded by agreement (such as cases of fraud, wilful misconduct or gross negligence). Termination circumstances that may be negotiated and agreed by the parties include: • material breaches of warranties or covenants between signing and closing; the agreement will usually specify what constitutes a “material” breach and may require the breach to be incapable of remedy or not remedied within a specified cure period; • failure to satisfy conditions precedent to closing (such as regulatory approvals, third-party consents or financing);
• non-compliance with the obligations of the buyer or the seller in connection with actions at closing; and/or • an event causing a material adverse change; the definition of a material adverse change and the threshold for triggering termination are usually heavily negotiated. Termination rights are generally closely linked to the longstop date, as a key temporal trigger for walking away from the deal. The length of the longstop period will depend on the anticipated time required to sat - isfy the conditions precedent, particularly regulatory approvals, or third-party consents. In practice, the longstop date in private equity transactions is often set between three and six months from signing, but it can be longer for deals requiring complex regulatory clearances. With increasing regulatory layers, longstop dates are often being extended or made automatically renewa - ble for specific regulatory clearance scenarios. Buyers in competitive processes are facing greater pressure to limit walk-away rights and accept tighter definitions of breach or material adverse change events. 6.8 Allocation of Risk In locked-box consideration structures, which are the most common structures in private equity transac - tions, the typical allocation of risk between the locked- box date and the closing date is the agreement on protection by way of the ordinary course of business provisions, with no leakage warranties and covenants. Typically, the parties agree on warranties considering the information disclosed to the buyer, which limits the scope of the warranties to a certain extent. Private equity buyers also often push to obtain a disclosure letter from the seller. To the extent that a buyer identifies a risk in the course of the due diligence, parties negotiate either an adjust - ment of the purchase price or an indemnity protection. Generally, indemnities are not subject to limitations other than (sometimes) with respect to the amount and time limitations, but in any case they are not qualified by disclosures. The liability of the seller with respect to fundamental warranties, such as claims for
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